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XXXII 
THE  GUARANTY  OF  BANK  DEPOSITS 


THE  GUARANTY  OF 
BANK  DEPOSITS 


BY 


THOMAS  BRUCE  ROBB,  PH.D. 

*«* 

ASSOCIATE  PROFESSOR  OF  ECONOMICS 
UNIVERSITY  OF  MISSOURI 


BOSTON  AND  NEW  YORK 

HOUGHTON  MIFFLIN  COMPANY 

£bc  fiitirrrfiDr  prtM  Cambribge 

1921 


COPYRIGHT,  1921,  BY  HART,  SCHAFFNER  *  MARX 
ALL  RIGHTS  RESERVED 


TO 
MY  MOTHER 


PREFACE 

THIS  series  of  books  owes  its  existence  to  the  generosity  of 
Messrs.  Hart,  Schaffner  &  Marx,  of  Chicago,  who  have 
shown  a  special  interest  in  trying  to  draw  the  attention  of 
American  youth  to  the  study  of  economic  and  commercial 
subjects.  For  this  purpose  they  have  delegated  to  the  un- 
dersigned committee  the  task  of  selecting  or  approving  of 
topics,  making  announcements,  and  awarding  prizes  an- 
nually for  those  who  wish  to  compete. 

For  the  year  ending  June  1,  1919,  there  were  offered: 

In  Class  A,  which  included  any  American  without  re- 
striction, a  first  prize  of  $1000,  and  a  second  prize  of  $500. 

In  Class  13,  which  included  any  who  were  at  the  time 
undergraduates  of  an  American  college,  a  first  prize  of  $300, 
and  a  second  prize  of  $200. 

Any  essay  submitted  in  Class  B,  if  deemed  of  sufficient 
merit,  could  receive  a  prize  in  Class  A. 

The  present  volume,  submitted  in  Class  A,  was  awarded 
second  prize  in  that  class. 

J.  LAURENCE  LAUGHLJN,  Chairman 

University  of  Chicago 
J.  B.  CLARE 

Columbia  University 
HENRT  C.  ADAMS 

University  of  Michigan 
EDWIN  F.  GAT 

N.Y.  Evening  Post 
THEODORE  E.  BURTON 

Washington 


AUTHOR'S  PREFACE 

THE  guaranty  of  bank  deposits  is  a  part  of  the  larger  ques- 
tion of  the  guaranty  of  bank  credit.  Bank  credit  is  an  ele- 
mental thing  consisting  of  purchasing  power  which  a  bank 
manufactures.  This  credit  manifests  itself  in  two  forms, 
namely,  bank  notes  and  bank  deposits.  The  first  chapter 
of  this  essay  deals  with  the  nature  of  bank  credit.  In  this 
chapter  no  attempt  is  made  at  an  exhaustive  discussion 
-  the  attempt  being  made  simply  to  show  the  general  na- 
ture of  this  phenomenon  and  its  significance  in  the  modern 
world.  The  second  chapter  deals  with  the  guaranty  of 
bank  credit.  In  this  chapter  the  characteristics  of  the  two 
forms  of  bank  credit  are  set  forth  and  a  description  is  given 
of  the  safeguards  that  have  been  thrown  around  each. 
With  this  broad  view  of  the  nature  of  bank  credit  and  the 
relationship  existing  between  bank  notes  and  bank  de- 
posits, the  way  is  cleared  for  a  l>etter  understanding  of  the 
strength  and  the  weakness  of  the  foundation  upon  which 
bank-deposit  guaranty  rests. 

In  succeeding  chapters  a  statement  is  given  of  the  frame- 
work and  the  operation  of  the  guaranty  laws  in  the  various 
states.  The  narrative  endeavors  to  present  what  has  oc- 
curred in  each  state.  But  attention  is  especially  called  to 
the  fact  that  as  each  state  is  considered  no  attempt  is  made 
to  weigh,  in  the  light  of  the  experience  of  that  state,  the 
much-mooted  questions  of  bank  guaranty.  The  discussion 
of  these  questions  is  deferred  to  chapter  vin,  where  the 
testimony,  gathered  from  all  the  states,  is  brought  together 
and  collated  for  the  purpose  of  showing  what  light  is  thrown 
on  these  issues. 


x  AUTHOR'S  PREFACE 

Finally,  the  reader  is  warned  that  this  subject  is  still 
surcharged  with  controversial  heat.  It  yet  gets  "vitriolic 
attack  or  sublimated  adulation."  Time  having  not  yet 
furnished  a  perspective,  no  one  can  be  certain  that  he  is 
free  from  that  bias  which  is  so  fatal  to  scientific  work. 

In  the  preparation  oft  this  little  book  I  am  deeply  obli- 
gated to  many  persons.  Most  of  all  am  I  indebted  to  Pro- 
fessor Fred  R.  Fairchild,  of  Yale  University,  at  whose  sug- 
gestion the  study  was  begun  and  whose  advice  has  greatly 
influenced  the  general  method  of  development.  Professor 
R.  B.  Westerfield,  of  Yale  University,  has  read  the  entire 
manuscript  and  I  wish  to  acknowledge  with  gratitude  his 
invaluable  assistance  with  every  chapter  of  the  book.  I  am 
also  under  special  obligation  to  Mr.  Thornton  Cooke, 
president  of  the  Columbia  National  Bank  of  Kansas  City, 
Missouri,  for  reading  the  manuscript.  Mr.  Cooke  is  well 
known  as  the  closest  and  safest  student  of  the  guaranty 
movement,  and  he  has  given  me  many  suggestions  that  I 
have  incorporated  bodily  into  the  work.  Finally,  I  am  in- 
debted to  Professors  A.  B.  Adams,  Jerome  Dowd,  and  J.  R. 
Cable,  of  the  University  of  Oklahoma,  for  going  over  my 
work  and  giving  helpful  criticism. 

THOMAS  BRUCE  ROBB 

June  1,  1920 


CONTENTS 

I.  THE  NATURE  OF  BANK  CREDIT  1 

n.  GOVERNMENT  GUARANTY  OF  BANK  CREDIT  7 

III.  THE  OKLAHOMA  SYSTEM  20 

1.  Conditions  antecedent  to  the  guaranty  law  20 

2.  Experimental  legislation  and  the  frontier  24 
8.  The  law  and  its  amendments  26 

4.  Insurance  phases  of  the  law  81 

5.  The  law  in  the  courts  84 

6.  The  nature  of  the  banks  insured  87 

7.  Bank  failures  42 

8.  The  burden  and  the  incidence  of  the  guaranty  assess- 
ments 73 

9.  The  effects  of  the  law  on  the  state  and  the  national 
banks  82 

10.  Causes  of  bank  failures  88 

IV.  THE  KANSAS  SYSTEM  107 

1.  Conditions  antecedent  to  the  guaranty  law  107 

2.  The  law  and  its  amendments  111 

3.  Bank  failures  117 

4.  The  effects  of  the  law  on  the  state  and  the  national 
banks  122 

V.  THE  NEBRASKA  SYSTEM  131 

1.  Conditions  antecedent  to  the  guaranty  law  131 

2.  The  law  and  its  amendments  133 

3.  Bank  failures  136 

4.  The  effects  of  the  law  on  the  state  and  the  national 
banks  137 

VI.  THE  TEXAS  SYSTEM  145 

1.  Conditions  antecedent  to  the  guaranty  law  145 

2.  The  Texas  law  148 


xii  CONTENTS 

3.  Bank  failures  152 

4.  The  effects  of  the  law  on  the  state  and  the  national 

banks  156 

VII.  DEPOSIT  GUARANTY  m  OTHER  STATES  160 

1.  Unsuccessful  bank-guaranty  agitation  160 

2.  The  South  Dakota  system  162 

3.  The  Mississippi  system  165 

4.  The  Washington  system  170 

5.  The  North  Dakota  system  172 

Vlll.  THE  EFFECTS  OF  THE  LAWS  176 

1.  The  purpose  of  this  chapter  176 

2.  The  necessity  of  guaranty  legislation  17J 

3.  Bank  guaranty  as  a  cure  for  panics  180 

4.  Conservative  bankers  watching  the  reckless  185 

5.  Bank  guaranty  as  a  promoter  of  reckless  banking  187 

6.  The  injustice  of  bank-guaranty  laws  192 

7.  The  effect  of  guaranty  laws  on  hoarded  money  199 

IX.  CONCLUSION  202 

BIBLIOGRAPHY  205 
INDEX 


INDEX  OF  CHARTS 

CHART 

I.  RELATIVE  CHANGES  IN  NUMBER  OF  OKLAHOMA  STATE 

AND  NATIONAL  BANKS  84 

n.  RELATIVE  CHANGES  IN  DEPOSITS  OF  OKLAHOMA  BANKS  85 

III.  CHANGES  IN  NUMBER  OF  KANSAS  BANKS  126 

IV.  CHANGES  IN  DEPOSITS  OF  KANSAS  BANKS  127 
V.  CHANGES  IN  NUMBER  OF  NEBRASKA  BANKS  141 

VI.  CHANGES  IN  DEPOSITS  OF  NEBRASKA  BANKS  142 

VII.  CHANGES  IN  NUMBER  OF  TEXAS  BANKS  157 

VIII.  CHANGES  IN  DEPOSITS  OF  TEXAS  BANKS  158 


THE  GUARANTY  OF 
BANK  DEPOSITS 

CHAPTER  I 
THE  NATURE  OF  BANK  CREDIT 

SOCIETY  is  best  served  when  its  working  capital  is  directed 
into  the  hands  of  those  persons  best  fitted  to  use  it.  This  is 
the  transcendent  service  of  a  bank.  A  commercial  bank 
collects  the  temporarily  inactive  funds  of  innumerable  indi- 
viduals, and,  upon  this  as  a  foundation,  creates  its  own 
superstructure  of  credit  which  it  places  at  the  disposal  of 
other  individuals  seeking  short-term  loans.  These  lenders 
and  borrowers  can  get  together  effectively  only  through  the 
instrumentality  of  a  bank.  Borrowers  want  substantial 
sums  for  certain  periods  of  time;  but  the  surplus  capital  of 
a  community  is  in  small  amounts  scattered  in  many  hands. 
In  this  shape  it  is  utterly  useless  to  the  borrower  wanting 
large  sums  for  stated  periods.  The  commercial  bank  does 
much  more,  however,  than  simply  come  between  these  two 
parties  and  bring  them  together;  it  marshals  these  innumer- 
able driblets  collected  from  lenders,  and,  using  them  as  a 
basis  for  its  credit,  multiplies  manyfold  the  purchasing 
power  that  may  be  placed  at  the  disposal  of  borrowers. 
A  bank  thus  not  only  economizes  the  capital  of  a  com- 
munity, but  also  at  the  same  time  performs  the  inesti- 
mable service  of  selecting  those  persons  best  fitted  to  use  it. 
Society  has  recognized  this  service,  and  the  bank,  holding 
its  commission  in  common  with  other  corporations  from  the 
government  itself,  is  permitted  the  profits  of  the  business 
as  a  remuneration  for  its  services. 

As  suggested  in  the  foregoing  paragraph,  the  object  of 
the  bank  is  primarily  not  to  reloan  the  collected  funds,  but 


2        THE  GUARANTY  OF  BANK  DEPOSITS 

rather  to  use  a  part  of  them  as  a  reserve  on  which  to  extend 
its  credit.  This  reserve,  of  course,  is  not  the  real  basis  of 
bank  credit,  but  because  of  legal  requirements  it  serves 
rather  as  a  limit  to  the  credit-manufacturing  process.  The 
bank  makes  its  credit  greatly  enlarge  the  efficiency  of  cap- 
ital; but  by  skillful  banking  it  is  able  to  make  one  dollar  in 
its  reserve  support  many  dollars  in  credit.  In  this  way  it 
greatly  increases  its  loans  and  so  its  profits  and  at  the 
same  time  multiplies  the  productive  forces  of  the  commu- 
nity. Thus  a  bank  is  commonly  described  as  a  manufac- 
turer of  credit.  Macleod  says  that  the  mystery  and  con- 
fusion of  banking  is  cleared  away  by  simply  observing  that 
a  bank  is  merely  a  shop  for  the  sale  of  credit.1  It  now  re- 
mains to  show  more  fully  the  nature  of  this  bank  credit. 

When  a  customer  pays  in  money  to  his  account  with  his 
banker,  he  cedes  the  absolute  property  hi  the  money  to  the 
banker  and  receives  in  exchange  for  it  a  Right  of  Action,  or 
Credit,  or  Debt,  to  demand  an  equivalent  sum  of  money  at  any 
tune  he  pleases,  but  not  the  identical  money.2 

As  this  quotation  shows,  from  the  legal  point  of  view  the 
banker  gains  a  property  right  in  his  customer's  deposit,  but 
the  depositor  retains  the  right  to  draw  on  demand.  The 
depositor,  by  putting  his  money  in  the  bank,  admits  by  im- 
plication that  he  is  not  going  to  use  it  at  once;  otherwise  he 
would  never  have  deposited  it  in  a  bank.  The  banker  finds 
that  daily  his  depositors  are  drawing  checks  against  their 
accounts.  But  at  the  same  time  others  are  bringing  in 
money  and  depositing.  By  actual  experience  he  finds  that 
this  inflow  and  outflow  of  money  practically  cancel  each 
other,  while  his  cash  account  stands  almost  untouched. 
"The  banker's  cash  is,  therefore,"  says  Macleod,  "like 
a  column  of  gold  with  a  slight  ripple  on  the  surface."  3 
The  banker  is  quick  to  see  the  possibilities  of  this  situation 
—  possibilities  greatly  enhanced  by  the  modern  check 
system. 

1  The  Theory  of  Credit,  p.  606.       *  Ibid.,  p.  594.       3  Ibid.,  p.  591. 


THE  NATURE  OF  BANK  CREDIT     S 

It  is  evident  that  in  loaning  a  large  part  of  these  accumu- 
lated funds  there  is  a  source  of  profit  for  the  bank.  But  the 
bank  can  do  even  better  yet  by  using  such  of  the  funds  as 
are  cash  as  a  reserve  for  the  extension  of  its  credit.  Farm- 
ers, merchants,  and  manufacturers  come  to  the  bank  seek- 
ing loans.  The  prospective  borrower  gives  to  the  bank  his 
note,  possibly  secured  by  a  mortgage  on  personal  property 
or  other  collateral,  for  the  loan.  What  he  really  does  is  to 
sell  this  credit  instrument  to  the  bank,  and  the  bank,  in- 
stead of  actually  giving  him  money  to  the  amount  stipu- 
lated, gives  him  a  book  credit  with  the  right  to  draw  that 
amount.  This,  of  course,  is  a  deposit,  but  instead  of  being 
occasioned  by  the  customer  depositing  money  with  the 
bank,  it  was  in  fact  occasioned  by  a  creation  of  bank  credit 
which  the  customer  accepted  from  the  bank  in  lieu  of  cash 
when  it  purchased  his  note.  The  bank  continues  this  loan- 
ing process  until  its  deposits  are,  say,  five  or  six  times  its 
cash  account.  Thus  an  insignificant  part  of  the  commercial 
deposits  is  created  by  the  deposit  of  money;  the  great  ma- 
jority of  them  is  created  by  the  granting  of  loans.  It  is 
patent  that  if  the  borrower  demanded  cash  over  the 
counter,  the  bank's  loaning  power  would  soon  reach  its 
limit.  But  in  the  large  majority  of  cases,  especially  where 
large  sums  are  involved,  a  checking  account  is  much  more 
convenient  to  the  borrower  and  it  is  infinitely  more  profit- 
able to  the  bank.  To  the  bank  the  checking  system  is 
largely  a  transfer  of  the  right  to  draw  from  one  account  to 
another.  If  the  bank  cannot  effect  this  operation  on  its  own 
books,  the  banks  among  themselves  accomplish  it  through 
the  clearing-house.  In  this  way  the  checking  system,  by 
economizing  the  bank's  cash  account,  greatly  extends  the 
field  of  bank  credit  and  thereby  enhances  the  profits  of  the 
business. 

Such  is  the  manner  in  which  a  bank  manufactures  credit. 
Back  of  this  credit  is  a  small  percentage  of  cash  and  the 
tangible  assets  of  all  those  persons  to  whom  the  bank  has 


4   THE  GUARANTY  OF  BANK  DEPOSITS 

granted  loans.  The  bank  draws  interest  on  the  individual 
credit  that  it  has  bought,  and  as  it  generally  exchanges 
therefor  its  own  credit,  it  thus  in  effect  draws  interest  on 
its  own  credit  and  consequently  finds  the  credit-manu- 
facturing process  a  lucrative  business.  Since  the  manufac- 
ture of  credit  is  not  an  expensive  process,  there  is  naturally 
a  temptation  to  extend  the  operation  as  far  as  possible. 
The  question  at  once  arises,  how  far  can  this  operation  go? 
The  answer  to  the  question  is  found  in  the  nature  of  the 
deposit.  A  deposit  is  a  right  to  draw  on  demand  and  the 
bank  cannot  extend  its  credit  transactions  beyond  the 
point  where  it  is  able  to  meet  them  on  demand.  It  is  here 
that  the  technique  of  banking  appears.  Since  a  banker 
must  hold  himself  ready  to  meet  his  deposit-liabilities  on 
demand,  it  is  evident  that  he  must  not  permit  his  assets  to 
get  beyond  the  point  where  he  is  able  to  supply  cash. 
Short-term  loans  are  therefore  dear  to  the  heart  of  the 
cautious  banker  and  it  is  his  constant  concern  to  keep 
their  dates  of  maturity  well  distributed.  Thus  the  banker 
will  find  his  depositors  presenting  checks,  many  of  which 
must  be  satisfied  with  cash,  but  by  skillful  marshaling  of 
his  assets  he  brings  it  about  that  his  maturing  loans  fur- 
nish him  a  stream  of  money  for  this  purpose. 

So  much  as  to  the  nature  of  bank  credit.  It  is  now  possi- 
ble to  see  the  service  a  bank  performs  as  an  insurer  of  indi- 
vidual credit. 

The  borrower  took  his  own  credit  to  the  bank  and  exchanged 
it  at  a  discount  for  the  credit  of  the  bank,  namely  a  bank  de- 
posit. The  borrower  took  to  the  bank  his  own  promise  to  pay 
money;  he  bore  away  from  the  bank  the  bank's  promise  to  pay 
money.1 

The  reason  the  borrower  was  willing  to  exchange  at  a  dis- 
count his  own  credit  for  that  of  the  bank  was  the  fact  that 
the  bank's  credit  enjoyed  a  wider  acceptability.  As  Pro- 
fessor Fisher  says : 

1  Johnson,  Money  and  Currency,  p.  45. 


THE  NATURE  OF  BANK  CREDIT     5 

Through  banking,  he  who  possesses  wealth  difficult  to  exchange 
can  create  a  circulating  medium  based  upon  that  wealth.  He 
has  only  to  give  his  note,  for  which,  of  course,  his  property  is 
liable,  get  in  return  the  right  to  draw,  and  lo!  his  comparatively 
unexchangeable  wealth  becomes  liquid  currency.  To  put  it 
crudely,  deposit-banking  is  a  device  for  coining  into  dollars 
land,  stoves,  and  other  wealth  not  otherwise  generally  exchange- 
able.1 

The  bank  thus  makes  a  business  of  studying  individual 
credit  and  one  of  its  great  services  to  the  public  is  its  ability 
and  willingness  for  a  given  remuneration  to  substitute  what 
White  calls  its  well-known  credit  for  the  individual's  less- 
known  credit.2  President  Hadley  calls  this  operation  the 
insurance  of  credit : 

It  [the  bank]  may  be  said  to  insure  credit.  If  it  discounts  a 
three  months'  note  and  allows  the  maker  to  draw  checks  upon 
the  sum  with  which  it  credits  him,  it  protects  the  public,  which 
accepts  such  checks,  from  the  risk  of  subsequent  insolvency  on 
the  part  of  the  maker.  It  is  because  this  insurance  is  effective 
that  the  public  will  accept  checks  where  it  will  not  accept  promis- 
sory notes.* 

Bank  credit  touches  intimately  the  life  of  every  indi- 
vidual. As  civilization  becomes  more  differentiated,  the 
production  and  distribution  of  goods  on  which  it  rests  be- 
come more  intricate.  Bank  credit  is  the  unguent  which 
lubricates  this  ponderous  machine  by  which  society  is  sus- 
tained, for  "the  banking  system  of  the  country  stands  at 
the  center  of  the  market,"  and  "it  is  the  market  that  holds 
the  center  of  the  industrial  field  and  gives  to  business,  how- 
ever specialized,  its  unity  of  purpose."  4  It  is  evident, 
therefore,  that  anything  which  gives  stability  to  bank 
credit  is  at  the  same  time  giving  stability  to  the  founda- 
tions of  society  itself. 

The  development  of  bank  credit  has  proved  a  great  boon 

1  Elementary  Principle*  of  Economic*,  p.  173. 

1  Money  and  Banking  (5th  ed.).  P-  20*.  *  Economics,  p.  245. 

4  II.  C.  Adams,  Description  of  Industry,  p.  154. 


6        THE  GUARANTY  OF  BANK  DEPOSITS 

to  mankind,  but  it  is  a  blessing  that  cannot  be  abused  with 
impunity.  As  already  indicated,  commercial  banks  build 
their  credit  on  a  community's  deposits.  In  a  sense  they 
become  the  trustees  of  this  capital,  and  when  this  trust  is 
abused  either  through  dishonesty  or  incompetency,  the 
public  is  the  large  sufferer.  Dishonest  bankers  may  build 
up  large  deposit  accounts,  make  a  wrong  use  of  them,  and 
rob  the  community.  Incompetent  bankers  may  be  the  vic- 
tims of  dishonest  and  reckless  borrowers  with  the  same 
result.  Bank  credit,  extended  to  assist  in  a  productive 
process,  is  sound  and  wholesome  only  when  that  process 
ripens  into  goods  which  will  liquidate  the  loan.  Crop  fail- 
ures, fires,  interrupted  transportation,  and  other  unforeseen 
calamities  may  intervene  and  upset  the  best  of  calculations. 
The  banker,  after  all,  is  only  a  human  being,  and  specula- 
tion in  its  various  degrees  is  his  most  insidious  temptation. 
This  is  a  situation  fraught  with  great  public  danger,  and 
nowhere  has  this  danger  been  greater  than  in  the  United 
States  with  its  adherence  to  the  democratic  principle  of 
free  banking.  Bank  notes  and  bank  deposits  are  the  two 
forms  in  which  bank  credit  manifests  itself,  and  since  the 
bank  as  a  corporation  holds  its  commission  from  the  gov- 
ernment to  engage  in  this  business  peculiarly  affected  with 
a  public  interest,  the  government  attempts  to  guard  the 
public  from  the  dangers  of  these  two  credit  instruments. 
With  this  view  of  the  nature,  the  importance,  and  the 
dangers  of  bank  credit,  we  pass  on  to  a  consideration  of  the 
safeguards  that  have  been  thrown  around  bank  notes  and 
bank  deposits. 


CHAPTER  H 
GOVERNMENT  GUARANTY  OF  BANK  CREDIT 

THE  world's  representative  banking  systems  are  in  agree- 
ment that  note  issues  must  have  adequate  security.  The 
Bank  of  England,  with  a  few  unimportant  exceptions,  has 
a  monopoly  of  note  issue.  It  is  permitted  to  issue  up  to 
about  $90,000,000  in  notes  which  must  be  secured  by  gov- 
ernment bonds.  Beyond  this,  notes  can  be  issued  only  on 
gold  which  is  held  in  the  vaults  of  the  Issue  Department  of 
the  Bank.1  In  Canada  the  notes  of  the  banks  are  secured 
by  a  prior  lien  on  the  general  assets  of  the  banks  plus  a  five 
per  cent  guaranty  fund.2  The  Bank  of  France  enjoys  a 
monopoly  of  note  issue  which  is  regulated  by  the  law  of 
Napoleon,  namely,  that  notes  must  be  covered  either  by 
coin  held  by  the  Bank,  or  notes  secured  by  collateral  and 
two  signatures,  or  by  notes  signed  by  three  responsible 
persons.3  The  German  Imperial  Bank  and  other  German 
note-issuing  banks  are  required  to  hold  in  their  vaults 
gold  or  government  gold  certificates  to  the  amount  of  one 
third  of  their  circulation.  The  balance  of  their  circulation 
must  be  covered  by  discounted  notes  that  bear  the  names 
of  two  good  solvent  parties.4  In  the  United  States,  under 
the  old  national  banking  system,  the  national  banks  alone 
were  permitted,  without  the  burden  of  a  prohibitive  tax, 
the  privilege  of  note  issue.  These  banks  were  required  to 
purchase  United  States  bonds,  and  upon  depositing  them 

1  White,  Money  and  Banking  (5th  ed.),  p.  372.  Of  course  this  state- 
ment regarding  the  Bank  of  Kngland  as  well  as  the  other  foreign  banks 
refers  to  normal  pre-war  conditions. 

1  Ibiti..  p.  382. 

1  Interriew*  on  thf  Banking  8  y  firms  of  Europt,  National  Monetary 
Commission,  p.  195. 

4  The  Reichtbank,  National  Monetary  Commission,  pp.  6&-70. 


8        THE  GUARANTY  OF  BANK  DEPOSITS 

with  the  United  States  Treasury  were  permitted  to  issue 
notes  upon  them.  In  addition  to  this  a  gold  deposit  equal 
to  five  per  cent  of  the  note  issue  must  be  made  with  the 
Treasury.  With  these  bonds  and  the  five  per  cent  redemp- 
tion fund  to  protect  it,  the  United  States  Treasury  redeems 
on  demand  the  bank  notes  that  may  be  presented.  The 
federal  reserve  notes,  issued  under  the  federal  reserve  sys- 
tem, are  covered  by  an  equal  amount  of  collateral  furnished 
by  the  member  bank  desiring  these  notes.  This  collateral 
must  also  bear  the  endorsement  of  the  member  bank  fur- 
nishing it.  The  federal  reserve  bank  issuing  the  notes  must 
hold  back  of  them  a  gold  reserve  of  not  less  than  40  per 
cent.  In  addition  to  this  the  notes  are  obligations  of  the 
United  States  Government.1  Thus  the  leading  govern- 
ments of  the  world  secure  note  issues  either  by  the  deposit 
of  gold,  the  deposit  of  other  unquestioned  collateral,  or  by 
a  prior  lien  on  the  general  assets  of  the  issuing  bank.  From 
this  it  is  seen  that  the  universal  practice  is  to  guard  the 
note  issues  so  strictly  as  almost  to  preclude  the  possibility 
of  loss  to  the  individual. 

As  regards  deposits,  on  the  other  hand,  the  policy  is 
quite  the  reverse.2  In  foreign  countries  governmental  regu- 
lation is  the  exception  rather  than  the  rule,  and  the  whole 
matter  of  reserves,  capital,  and  other  banking  regulations 
is  left  with  the  banks,  working  under  the  law  of  self-preser- 

1  The  Federal  Reserve  Ad,  section  16. 

2  "Publicity  is  alone  sufficient,  in  the  case  of  the  great  monopoly  banks 
of  issue,  to  afford  reasonable  safeguards  against  unsound  banking  and 
undue  reduction  of  reserves.  The  cash  reserves  of  these  banks,  their  loans, 
and  their  relation  to  their  deposit  liabilities  are  promptly  telegraphed 
around  the  world  and  have  become  a  barometer  of  monetary  conditions 
which  is  eagerly  awaited  from  week  to  week  in  every  financial  center. 
They  are  scanned  constantly  by  the  most  expert  financiers  and  economic 
students  as  well  as  by  business  men  and  officials  of  the  government. 
Government  supervision  of  the  monopoly  banks  of  issue  is  practically 
limited  to  the  requirement  that  these  reports  shall  be  made,  since  the 
reports  themselves  afford  the  evidence  that  the  reserve  and  the  character 
of  securities  held  are  in  accordance  with  the  character  of  the  bank." 
Conant,  The  Principles  of  Money  and  Banking,  vol.  n,  pp.  102-03. 


GUARANTY  OF  BANK  CREDIT  9 

vation,  to  adjust  as  their  needs  demand.1  The  United 
States  has  gone  much  farther  than  foreign  countries  in  this 
respect,  the  necessity  for  this  action  being  well  stated  by 
Professor  Laughlin: 

Where  the  business  of  banking  is  not  a  monopoly,  but  is  thrown 
open  to  any  group  of  persons  who  may  wish  to  enter  it,  that  is, 
under  a  regime  of  so-called  free  banking,  there  will  probably  be 
a  few  failures  from  time  to  time.  Under  a  system  where  the  busi- 
ness is  concentrated  in  a  few  hands,  risks  are  less  and  those  which 
exist  are  met  by  larger  resources.  Above  all,  the  best  of  experi- 
ence and  business  judgment  is  in  charge  of  affairs.  There  is  little 
more  likelihood  of  the  failure  of  the  strong  financial  institutions 
of  the  world,  such  as  the  banks  of  France  or  England,  than  there 
is  of  the  failure  of  all,  or  a  large  proportion  of,  the  banks  in  the  na- 
tional banking  system  —  an  occurrence  scarcely  more  to  be  an- 
ticipated than  the  breakdown  of  the  whole  business  community 
itself.  This  absolute  security,  obtainable  by  committing  the  busi- 
ness of  banking  to  one  or  to  a  few  large  financial  institutions,  is 
sacrificed  under  a  system  of  free  banking  like  our  present  one. 
This  is  the  price  paid  for  freedom  of  opportunity  to  engage  in  the 
business.1 

As  this  quotation  indicates,  the  United  States,  in  her 
zeal  to  preserve  freedom  of  opportunity  in  the  banking 
business,  has  greatly  increased  the  danger  to  the  depositing 
public.  All  through  American  history  this  danger  has  been 
a  very  real  one.  Here  almost  every  section  of  the  country 
has  experienced  a  phenomenal  growth  in  its  day,  and  the 
activities  of  banking  have  been  intimately  connected  with 
this  rapid  expansion.  A  spirit  of  optimism  and  speculation 
is  always  present  in  such  boom  times,  and  when  the  banks 
become  infused  with  this  spirit,  the  public  is  exposed  to 
great  danger.  At  times  heavy  losses  have  caused  much 
public  hardship,  and  there  has  been  much  state  inter- 
ference in  behalf  of  the  depositor. 

1  Belgium  sooms  to  he  an  exception  to  this  statement.  "In  Belgium 
ft  reserve  of  gold  and  gold  bills  equivalent  to  one-third  of  note  issues  plut 
deposits  is  required."  Marker,  The  Theory  of  Money,  p.  40. 

1  Report  of  the  Monetary  Commistion,  1898,  p.  £37. 


10      THE  GUARANTY  OF  BANK  DEPOSITS 

In  this  country  the  law  has  erected  a  formidable  and 
complicated  system  to  protect,  either  directly  or  indirectly, 
the  depositor.  Under  the  old  National  Banking  Law,  the  law 
regulating  reserves  divided  the  banks  of  the  country  into 
two  groups,  namely,  the  reserve  city  banks  and  the  country 
banks.  The  reserve  city  banks  were  divided  into  two 
classes.  Those  in  the  central  reserve  cities  —  New  York, 
Chicago,  and  St.  Louis  —  were  required  to  keep  a  reserve 
equal  to  twenty-five  per  cent  of  their  deposits.  The  banks 
in  the  other  reserve  cities  had  also  to  keep  a  twenty-five 
per  cent  reserve,  but  one  half  of  this  might  be  kept  with 
the  central  reserve  city  banks.  The  country  banks  had  to 
keep  a  reserve  equal  to  fifteen  per  cent  of  their  deposits, 
but  two  thirds  of  this  might  be  deposited  with  the  central 
reserve  or  reserve  city  banks.  The  new  Federal  Reserve 
Act  has  reduced  considerably  these  percentages,  but  has 
centralized  the  reserves  in  each  reserve  district  instead  of 
concentrating  them  in  one  or  two  large  cities.  Much  the 
same  reserve  regulations  for  state  banks  are  found  in  the 
various  states/This  complicated  reserve  requirement  is  a 
direct  legal  safeguard  to  protect  the  depositor  J  Stringent 
laws  regulate  the  size  of  loans  which  may  be  made  to  indi- 
viduals, directors,  or  other  bank  officials.  National  and 
almost  all  state  governments  maintain  highly  trained  corps 
of  bank  examiners,  who  periodically  examine  the  condition 
of  the  banks.1  Publicity  of  statements  is  required,  so  that 
he  who  runs  may  read.  In  case  of  failure  each  stockholder 
in  national  banks  and  in  many  of  the  state  banks  is  liable 
to  double  the  amount  of  his  stockholdings.  Professor 
Laughlin  has  estimated  2  that  the  capital,  surplus,  undi- 

1  "The  American  system  of  examination  is  the  most  thorough  in  the 
world.    This  has  been  a  natural  and  almost  necessary  outgrowth  of  the 
fact  that  the  system  is  the  most  widely  extended  and  contains  the  largest 
number  of  small  independent  banks.   Safety,  therefore,  could  be  less  easily 
secured  by  reliance  upon  the  action  of  the  banks  themselves  than  in  the 
countries  where  the  number  of  banks  of  issue  is  comparatively  limited." 
Conant,  The  Principles  of  Money  and  Banking,  vol.  u,  pp.  104--05. 

2  Banking  Progress,  p.  112. 


GUARANTY  OF  BANK  CREDIT     11 

vided  profits,  and  stockholders'  double  liability  alone  con-  j 
stitute  a  cash  insurance  fund  of  forty-five  per  cent  of  indi- 
vidual deposits.  This  fund,  in  connection  with  the  legal 
reserve  requirements,  and  other  banking  regulations,  has 
built  up  such  a  bulwark  around  deposits  that,  since  the 
establishment  of  the  national  banking  system,  the  average 
annual  loss  to  depositors  in  national  banks  has  amounted 
to  only  one  twentieth  of  one  per  cent  of  their  deposits.1 

However,  the  smallness  of  this  average  rate  of  loss  cannot 
be  accepted  as  a  criterion  by  which  to  measure  the  amount 
of  suffering  caused  to  the  public  from  losses  occasioned  by 
bank  failures.  This  rate  represents  only  the  loss  in  na- 
tional banks.  Undoubtedly,  if  a  composite  rate  could  be 
made  from  the  losses  occasioned  through  state  banks,  it 
would  be  much  greater.  But  whatever  this  rate  may  be, 
the  fact  remains  that  these  losses  have  not  been  distributed 
over  this  long  period  of  time  and  among  all  the  depositors 
of  the  country  in  proportion  to  this  average  rate,  but  have 
fallen  at  certain  times  upon  certain  individuals  and  com- 
munities and  have  been  matters  of  much  serious  concern. 
The  fact  remains  that  the  government  does  not  give  the 
depositor  the  same  protection  which  has  been  given  to  the 
note-holder,  and  the  possibility  of  loss  is  such  a  nightmare 
to  the  public  that  a  banker's  reputation  for  safe  and  conserv- 
ative banking  is  prized  more  by  him  than  silver  or  gold. 

One  reason  for  the  different  policy  pursued  as  to  the  se- 
curity for  bank  notes  and  for  bank  deposits  is  that  legisla- 
tors and  the  public  have  regarded  the  two  activities  as  being 
essentially  different  in  nature.  This  confusion  is  probably 
due  to  the  different  historical  development  of  the  two 
phases  of  banking.  Banks  and  note  issues  have  always  gone 
together  in  American  history.  From  early  colonial  days 
there  was  a  great  scarcity  of  specie,  and  it  was  the  crying 
need  of  a  medium  of  exchange  which  prompted  the  estab- 
lishment of  the  first  banks  in  the  colonies.  The  old  land 
1  Report  of  the  Comptroller  of  the  Currency,  1907,  p.  27. 


12      THE  GUARANTY  OF  BANK  DEPOSITS 

banks  of  Massachusetts  and  similar  banks  in  Pennsylvania 
confined  their  activities  exclusively  to  the  issue  of  their 
notes.  When  the  abuse  of  this  power  prompted  an  act  of 
Parliament  suppressing  the  issues,  this  action  was  made  one 
of  the  grievances  of  the  colonies  against  the  British  Govern- 
ment. At  that  time  banks  issued  their  credit  almost  ex- 
clusively in  the  form  of  bank  notes.1  The  fact  that  these 
bank  notes  were  a  medium  of  exchange,  and  that  any  inse- 
curity in  them  was  fraught  with  great  public  danger,  early 
impressed  itself  upon  legislators. 

In  1829  the  Safety-Fund  Banking  System  was  inaugu- 
rated in  New  York  State.  It  provided  for  a  special  fund  to 
guarantee  all  the  debts  of  the  banks.  The  intention  of  the 
law  was  to  provide  security  for  note  issues.  At  that  date 
deposit  banking  was  so  little  developed  that  the  framers  of 
the  law  apparently  overlooked  the  fact  that  bank  debts 
might  also  be  occasioned  by  deposits.2  It  was  in  the  period 
immediately  following  the  enactment  of  this  law  that  de- 
posit banking  began  to  assume  its  modern  proportions.  In 
New  York  between  1836  and  1860  the  notes  of  the  banks 
increased  only  fifty  per  cent,  while  in  the  same  period  the 
deposits  increased  over  seven  hundred  per  cent.3  The  panic 
of  1837  caused  widespread  bank  failures,  and  the  debts  of 
failed  banks  were  such  that  the  safety-fund  system  broke 
down  under  the  strain.  The  New  York  legislature  then 
realized  that  the  growth  of  deposit  banking  had  made  "  all 
the  debts  of  the  banks  "  consist  of  something  besides  those 

1  "The  abuse  of  banking  led,  of  course,  to  a  condemnation  of  the  forms 
most  in  evidence;  this  accounts  for  the  fact  that  down  to  the  Civil  War 
statutes  regulating  the  excesses  of  banking  related  chiefly  to  note  issues, 
as  if  they  were  the  only  forms  of  currency  created  by  banks;  while  the 
deposit  currency  has  been  wholly  ignored.   In  fact,  to  the  present  day  in 
our  country,  there  is  a  prevalent  belief  —  which  has  come  down  to  us  from 
the  earlier  decades  and  from  radically  different  conditions  —  that  the 
operations  of  a  bank  can  be  effectively  controlled  by  regulations  applied 
to  note  issues."  J.  Laurence  Laughlin,  The  Principles  of  Money,  p.  140. 

2  Safety-Fund  Banking  System,  National  Monetary  Commission,  pp. 
^72,  385.   Also,  Knox,  History  of  Banking,  p.  409. 

3  Safety-Fund  Banking  System,  National  Monetary  Commission,  p.  885. 


GUARANTY  OF  BANK  CREDIT     13 

occasioned  by  note  issues.  It  immediately  amended  the  law 
specifying  that  the  fund  should  cover  only  losses  arising 
from  note  issues.  The  New  York  legislature  seemed  to 
regard  note  issues  and  deposits  as  essentially  distinct  in 
nature.  It  seemed  to  feel  that  note  issues  must  be  sacredly 
guarded  by  law,  but  that  deposits  were  solely  a  matter  be- 
tween the  individual  and  the  bank.  The  same  philosophy 
appeared  at  the  creation  of  the  national  banking  system  in 
1863.  Note  issues  were  so  guarded  as  practically  to  pre- 
clude the  possibility  of  loss,  while  the  safety  of  deposits  was 
left  to  depend  on  the  partial  security  already  described. 

But  this  distinction  between  bank  notes  and  bank  de- 
posits has  little  justification  in  fact.  Writers  have  repeat- 
edly pointed  out  the  similarity  of  the  two  instruments. 
Says  Professor  Fisher: 

Besides  lending  deposit  rights,  banks  may  also  lend  their  own 
notes,  called  "bank  notes."  And  the  principle  governing  bank 
notes  is  the  same  as  the  principle  governing  deposit  rights.  The 
holder  simply  gets  a  pocketful  of  bank  notes  instead  of  a  credit 
on  his  bank  account.  The  bank  must  always  be  ready  to  pay,  on 
demand,  either  the  note  holders  —  i.e.,  to  "redeem  its  notes"  — 
or  the  depositors,  and  in  either  case  the  bank  exchanges  a  promise 
for  a  promise.1 

Macleod  says  that  "  deposits  are  nothing  but  bank  notes 
in  disguise."  Dunbar  in  the  following  quotation  shows 
clearly  the  fundamental  identity  of  these  two  forms  of 
bank  credit : 

A  little  consideration  of  the  manner  in  which  notes  are  issued 
by  banks  will  show  that  in  the  bank  note  we  have  only  another 
form  of  liability,  differing  in  appearance,  but  not  in  substance, 
from  the  liability  for  deposits.  The  bank  note  is  the  duly  certi- 
fied promise  of  the  lank  to  pay  on  demand,  adapted  for  circula- 
tion as  a  convenient  substitute  for  the  money  which  it  promises. 
It  is  issued  by  the  hank,  and  can  be  issued  only  to  such  persons 
as  are  willing  to  receive  the  engagement  of  the  bank  in  this  form 

1  Elfmcntary  Principle*  of  Economic*,  pp.  170-71. 
1  Theory  of  Credit,  p.  600. 


14      THE  GUARANTY  OF  BANK  DEPOSITS 

instead  of  receiving  money,  or  instead  of  being  credited  with  a 
deposit.  Thus  the  so-called  borrower,  who  in  the  first  instance 
has  been  credited  with  a  deposit  and  to  whom  the  bank  is,  there- 
fore, to  this  extent  liable,  may  prefer  to  draw  the  amount  in  notes 
of  the  bank  and  to  use  them  in  making  his  payments.  But  in 
this  case  it  is  plain  that  the  liability  of  the  bank  is  changed  only 
in  form;  it  is  still  a  liability  to  pay  a  certain  sum  of  money  on 
demand.  .  .  .  The  notes  issued  by  a  bank  are  thus  a  liability  dis- 
tinguishable in  form  only  from  its  liability  for  deposits,  and  the 
functions  of  deposit  and  issue,  spoken  of  at  the  opening  of  this 
chapter,  instead  of  being  distinct,  as  is  often  assumed,  are  one 
in  substance.1 

We  have  already  suggested  one  of  the  reasons  why  de- 
positors have  not  been  given  equal  protection  with  the 
holders  of  note  issues,  namely,  that  legislators,  as  a  rule, 
have  failed  to  recognize  the  similarity  of  the  two  kinds  of 
liability.  The  difference  in  the  form  of  the  function  has 
obscured  the  similarity  of  the  liability.  The  bank  note 
passes  from  hand  to  hand,  and  acceptance  is  practically 
compulsory  whether  the  recipient  knows  anything  of  the 
status  of  the  issuing  bank  or  not.  Since  the  poorer  classes 
relatively  have  fewer  bank  accounts,  they  naturally  make 
more  use  of  bank  notes,  and  these  classes  least  of  all  are  in 
a  position  to  judge  as  to  the  worth  of  the  bank  note.  On 
the  other  hand,  it  is  argued  that  the  depositor  chooses  his 
bank  and  can  thus  protect  himself.  The  bank  check,  in 
contrast  to  the  bank  note,  has  a  restricted  and  temporary 
circulation  and  the  parties  concerned  are  usually  in  a  posi- 
tion to  know  as  to  the  circumstances  of  its  issue.  Legisla- 
tors have  looked  upon  note-holders  as  in  voluntary  creditors, 
while  they  have  thought  of  depositors  as  voluntary  credi- 
tors. When  bank  notes  get  into  circulation  they  stay  out 
for  an  indefinite  time,  while  a  check  is  presented  almost  at 
once  for  payment.  For  this  reason  a  bank  is  more  apt  to 
grow  careless  in  its  preparation  to  redeem  its  note  issues. 
Legislators,  profoundly  impressed  by  these  differences, 
1  The  Theory  and  History  of  Banking,  pp.  17-18. 


GUARANTY  OF  BANK  CREDIT     15 

have  felt  the  necessity  of  throwing  special  safeguards 
around  the  bank  note. 

To  realize  the  full  significance  of  the  problem  of  pro- 
tecting deposit  credit,  the  historical  development  of  bank 
credit  must  be  kept  in  the  forefront.  It  is  immaterial  to 
the  profit  of  a  bank  whether  it  issues  its  credit  in  the  shape 
of  its  notes  or  in  deposits.  The  convenience  and  preference 
of  the  public  is  the  determining  factor  as  to  which  is  used. 
In  early  colonial  days  a  bank's  sole  activity  was  in  issuing 
its  notes.  This  was  the  kind  of  bank  credit  most  suitable  to 
the  time,  for  the  population  was  widely  scattered  and  many 
people  were  living  in  inaccessible  frontier  regions.  Trans- 
portation facilities  were  poor  and  communication  was  ex- 
tremely slow.  The  conditions  of  the  time  required  that  each 
person  carry  with  him  sufficient  currency  to  do  for  consid- 
erable periods  of  time.  Bank-note  credit  adapted  itself 
admirably  to  this  early  rural  economy.  But  times  changed. 
Wealth  accumulated;  population  multiplied;  and  means 
of  communication  were  revolutionized.  As  people  were 
drawn  closer  together,  it  became  unnecessary  for  each  per- 
son to  carry  around  on  his  person  such  large  sums  of  cur- 
rency. It  now  became  more  convenient  to  deposit  this 
money  in  a  bank  and  make  payments  by  check.  Thus 
deposit  credit  and  the  bank  check  proved  much  more 
suited  to  the  changed  conditions  until  now  bank  notes 
play  an  insignificant  part  in  the  total  transactions  of  the 
country. 

It  has  already  been  indicated  that  in  New  York  State 
the  note  issues  of  banks  increased  only  fifty  per  cent  be- 
tween 1836  and  1860,  while  in  the  same  time  the  deposits 
increased  over  seven  hundred  per  cent.  Dunbar  says  that 
it  was  not  until  1855  that  the  deposits  of  the  banks  of  the 
country,  taken  in  their  aggregate,  rose  above  their  note 
issues.1  Since  then  the  growth  of  deposit  credit  has  gone 
on  apace.  In  1918  the  individual  deposits  in  all  banks  in 
1  Quarterly  Journal  of  Economics,  1880.  1 : 405. 


16      THE  GUARANTY  OF  BANK  DEPOSITS 

the  United  States  amounted  to  $27,808,472,756.*  Of  these 
deposits  $12,116,364,158  were  subject  to  check.2  The 
checks  which  were  drawn  against  these  $12,116,364,158  of 
deposits  transacted  about  ninety-two  per  cent  of  the  busi- 
ness of  the  country.3  Thus  it  is  seen  that  bank  checks 
drawn  upon  deposits  are  the  real  currency  of  the  country, 
while  bank  notes  perform  only  a  minor  part  of  the  remain- 
ing eight  per  cent  of  the  business  transactions.  This  shows 
vividly  the  great  revolution  which  has  occurred  in  the 
realm  of  banking.  At  the  beginning  of  the  last  century 
bank  notes  and  specie  were  the  currency  of  the  country; 
to-day,  with  the  advent  of  deposit  banking,  deposit  cur- 
rency lubricates  the  channels  of  trade. 

When  the  total  bank  credit  of  the  country  is  considered, 
it  is  evident  that  bank  notes  play  a  relatively  minor  part  in 
the  economic  Me  of  the  people.  Furthermore,  the  problem 
of  giving  bank  notes  adequate  security  has  long  since  been 
solved.  On  the  other  hand,  as  population  becomes  denser 
and  communication  more  rapid,  the  importance  of  deposit 
credit  will  assume  even  larger  proportions.  It  is  with  the 
stability  of  this  form  of  bank  credit  that  the  public  is  now 
most  vitally  concerned.  If  proof  is  needed  that  the  major 
interest  of  the  public  has  now  been  shifted  to  deposit 
credit,  it  lies  close  at  hand.  Dunbar,  writing  more  than 
thirty  years  ago,  said: 

If  there  is  reason  for  demanding  that  the  currency  used  in  the 
small  transactions  of  the  community  shall  be  secure,  there  is  also 
reason  for  requiring  that  the  greater  currency  used  in  the  large 
transactions  shall  be  secure.4 

Professor  Seligman  a  few  years  ago  said: 

A  banking  system  is  not  safe  when  it  breaks  down  under  the 
first  strain.  When  bank  notes  so  far  exceeded  deposits  as  they 

1  Report  of  the  Comptroller  of  the  Currency,  1918,  vol.  I,  p.  120.      2  Ibid.. 

9  Fisher,  The  Purchasing  Power  of  Money  (revised  ed.),  p.  317.  See  the 
same  work,  pp.  491-92,  for  a  comparison  of  these  figures  with  those  of 
Professor  Kinley's  investigation  on  the  same  subject. 

4  Quarterly  Journal  of  Economics,  1886,  1 :417. 


GUARANTY  OF  BANK  CREDIT     17 

did  fifty  years  ago,  it  might  have  been  excusable  to  think  that  the 
safety  of  the  note-holder  meant  the  safety  of  the  business  com- 
munity; but  nowadays  the  test  of  safety  has  been  shifted  from 
notes  to  deposits,  and  our  system  provides  no  safety  for  the 
latter.1 

In  speaking  of  the  partial  security  of  deposits  already  de- 
scribed, Professor  Taussig  says : 

The  cause  of  this  remarkable  extension  of  state  interference 
is  to  be  found  partly  in  the  early  development  and  wonderful 
spread  of  deposit  banking,  but  still  more  in  an  underlying  dim 
consciousness  that  here  was  really  a  most  important  and  far- 
reaching  part  of  the  circulating  medium.  Once  the  system  is 
fully  established,  no  individual  can  keep  out  of  it.  It  is  indis- 
pensable that  he  have  his  bank  of  deposit  and  his  bank  account. 
And  though  he  may  choose  his  own  bank,  and  may  be  supposed 
to  be  on  the  watch  as  to  its  character  and  solvency,  his  means  of 
getting  information  are  necessarily  uncertain.  The  public  con- 
cern in  banking,  which  at  first  was  chiefly  for  the  security  of 
notes,  has  come  to  be  no  less  for  their  equally  pervasive  and  far 
more  powerful  successors,  the  deposits.2 

It  is  easy  enough  to  show  the  magnitude  and  the  impor- 
tance of  deposit  credit,  but  it  is  the  proportions  of  this  phe- 
nomenon that  make  legislation  so  difficult.  Note  issues  are 
only  a  small  part  of  the  total  liabilities  of  a  bank.  Conse- 
quently it  is  a  comparatively  simple  matter  for  each  bank 
to  set  aside  special  securities  for  them.  The  magnitude  of 
deposits  is  manyfold  that  of  note  issues.  Note  issues  during 
the  World  War  have  been  expanded  faster  relatively  than 
deposits;  consequently  it  is  impossible  to  give  any  stable 
ratio  that  the  one  bears  to  the  other.  During  this  war  the 
individual  deposits  averaged  from  fifteen  to  twenty  times 
the  note  issues  of  all  banks,  and  before  the  recent  remark- 
able expansion  of  bank  credit  by  means  of  the  issue  of  fed- 
eral reserve  notes,  the  relative  importance  of  deposits  was 
even  greater.  Since  a  bank's  liabilities  can  be  secured  only 

1  The  Outlook.  1911,  99:1056. 

1  Principle*  of  Economics  (revised  ed.),  vol.  i,  p.  388. 


18      THE  GUARANTY  OF  BANK  DEPOSITS 

by  its  assets,  it  is  evident  that  relatively  no  such  fund  is 
available  to  secure  deposits.  Legislators,  obsessed  with  the 
importance  of  note  issues,  have  given  them  a  prior  lien  on 
certain  of  the  bank's  assets  and  to  that  extent  further 
weakened  the  security  for  deposits.  Double  liability  of 
stockholders  is  wholly  inadequate  to  give  deposits  full 
security,  for  frequently  the  deposits  of  a  bank  equal 
twenty-five  times  its  capital  stock.  Capital,  surplus,  re- 
serves, etc.,  are  a  wholesome  check  on  unsafe  banking,  but 
modern  deposit  credit  is  pyramided  to  such  a  height  above 
this  foundation  that  the  only  ultimate  safety  depends  on 
the  nature  of  the  security  accepted  by  a  bank  in  exchange 
for  its  loans.  But  here  is  a  wide  margin  of  uncertainty. 
Flaws  in  human  character,  the  fallibility  of  human  judg- 
ment, as  well  as  the  unpredictable  behavior  of  the  great 
forces  of  nature,  render  the  deposits  of  all  banks  more  or 
less  insecure.  Consequently  no  one  bank,  acting  alone, 
can  give  to  its  deposits  a  security  like  that  given  to  its 
note  issues. 

But,  while  no  one  bank  can  give  anything  near  an  abso- 
lute security  for  its  deposits,  the  banks  working  together 
can  give  such  a  security.  This,  of  course,  is  the  familiar 
principle  of  insurance.  Because  of  the  aleatory  element  in 
life,  every  individual  is  confronted  with  certain  great  un- 
certainties. The  individual,  working  alone,  is  helpless  in 
providing  effective  guaranties  against  these  uncertainties. 
But  an  insurance  company,  assembling  a  large  number  of 
these  cases,  is  enabled  through  the  law  of  averages  to  re- 
duce these  individual  uncertainties  to  a  common  certainty. 
Thus  an  individual,  in  union  with  his  fellowmen,  can  pro- 
vide adequate  security  against  many  of  the  vicissitudes  of 
life.  So  with  a  bank.  While  no  one  bank  by  itself  can  give 
its  deposits  absolute  protection,  a  large  number  of  banks 
through  the  magic  of  foresight  and  cooperation  can  easily 
accomplish  this  end.  Eight  states  have  laws  —  called 
bank-guaranty  laws  in  those  states  —  providing  for  the 


GUARANTY  OF  BANK  CREDIT     19 

insurance  of  bank  deposits.  The  purpose  of  the  remainder 
of  this  essay  is  to  give  an  account  of  this  banking  experi- 
ment. A  history  of  the  laws  will  be  given,  including  a  de- 
scription of  the  laws,  their  manner  of  working,  and  their 
effects.  These  bank-guaranty  laws  have  gone  a  step  be- 
yond the  traditional  policy  of  banking  regulation,  and  we 
are  now  in  a  position  to  observe  them  in  actual  operation. 


1.  Conditions  antecedent  to  the  guaranty  law.  It  is  now 
more  than  twelve  years  since  the  State  of  Oklahoma  placed 
a  bank-deposit  guaranty  law  upon  her  statute  books.  The 
enactment  of  this  law  marked  the  beginning  of  a  remark- 
able movement  which,  within  nine  years,  placed  similar 
laws  upon  the  statute  books  of  Kansas,  Nebraska,  Texas, 
South  Dakota,  Mississippi,  Washington,  and  North  Da- 
kota, and  powerfully  influenced  many  other  states. 

The  Safety-Fund  Banking  Law  of  1829  was  the  first 
application  of  the  bank-guaranty  idea  in  this  country. 
But,  as  already  pointed  out,  deposit  guaranty  was  not  in- 
tended to  be  a  part  of  the  scheme  and  it  was  abandoned 
after  the  panic  of  1837.  This  experiment  seems  to  have  been 
forgotten,  and  it  is  doubtful  if  it  had  any  connection  what- 
ever with  the  revival  of  the  idea  in  the  West  nearly  a  cen- 
tury later.  There  is  record  of  a  few  scattered  attempts 
of  associated  banks  to  insure  mutually  their  deposits.  In 
Georgia  and  Florida  there  is  a  group  of  about  a  hundred 
banks  which  has  a  Mutual  Depositors'  Guaranty  Fund  to 
protect  deposits,1  but  such  attempts  have  attracted  little 
attention.  Bank-deposit  guaranty  as  we  know  it  to-day 
seems  to  have  been  associated  with  the  Populist  movement 
of  the  west-central  states.  In  Nebraska  during  Populist 
days  there  was  continual  agitation,  and  at  one  session  of 
the  legislature  a  serious  attempt  was  made  to  pass  a  bank- 
guaranty  law.2  John  W.  Breidenthal,  a  Populist  bank  com- 
missioner of  Kansas,  urged  such  a  law  in  his  Report  of 
September  1, 1898.3  Governor  Leedy,  a  Populist  governor 


1  The  Review  of  Reviews,  1908,  87:340. 

*  Quarterly  Journal  of  Economics,  1909,  24 : 355. 


Fourth  Biennial  Report  of  the  State  Bank  Commissioner,  pp.  xvi-rxi. 


THE  OKLAHOMA  SYSTEM  21 

of  Kansas,  called  a  special  session  of  the  legislature,  and 
the  bill  that  was  presented  passed  the  State  Senate  and 
lacked  only  four  votes  of  passing  the  House  of  Representa- 
tives.1 

The  cause  of  this  early  agitation  is  not  far  to  seek.  In  the 
strongholds  of  Populism  the  days  of  the  protracted  depres- 
sion of  1893  were  especially  trying  times.  One  crop  failure 
had  followed  another  in  rapid  succession.  Many  of  the 
assets  of  the  banks  were  in  the  form  of  boom  paper  held 
over  from  the  years  1886  and  1887.  The  serious  crop  fail- 
ures soon  squeezed  the  inflated  values  out  of  this  paper 
with  the  result  that  almost  every  other  bank  found  itself 
practically  insolvent.  The  numerous  bank  failures  of  this 
period  worked  incalculable  hardship,  and  the  Populist 
bank-guaranty  agitation  was  the  reflection  of  this  distress. 
In  1897  a  turn  for  the  better  came.  A  series  of  bountiful 
crops,  in  conjunction  with  other  favorable  conditions,  was 
a  boon  to  that  section  of  the  country.  By  1900  the  whole 
country  was  well  launched  on  the  upward  swing  of  a 
modest  boom  and  the  Populist  movement  and  the  bank- 
guaranty  agitation  went  out  together. 

The  next  time  we  hear  of  the  bank-guaranty  idea  was 
when  the  Oklahoma  Constitutional  Convention  met  in  the 
fall  of  1906. •  A  hard  fight  was  made  to  get  into  the  con- 
stitution a  provision  guaranteeing  bank  deposits.  Judge 
J.  T.  Dickerson,  of  Edmond,  Oklahoma,  read  a  paper  be- 
fore the  banking  committee  urging  such  a  provision.  Dick- 
erson was  a  Republican  and  had  been  through  the  fight  in 
Kansas  in  Populist  days.  Charles  N.  Haskell,  afterwards 
governor,  and  the  father  of  the  Oklahoma  law,  urged  the 
banking  committee  to  act  favorably  on  the  proposition,  his 
argument  being:  "We  want  this  constitution  adopted  by 
the  people."  The  proposal,  however,  had  some  strong 

1  The  Toprka  Daily  Capital,  September  5.  1909. 

1  The  material  for  this  paragraph  was  patheretl  from  a  conversation 
with  a  member  of  the  banking  committee  of  the  Oklahoma  Constitutional 
Convention. 


22      THE  GUARANTY  OF  BANK  DEPOSITS 

opponents  on  the  committee.  It  was  urged  that  the  propo- 
sition, being  of  legislative  character,  should  not  go  into  the 
constitution  which  was  already  too  long.  When  the  oppo- 
nents of  the  idea  found  they  controlled  a  majority  of  the 
committee,  they  brought  the  proposition  before  the  whole 
banking  committee  and  rejected  it  by  a  vote  of  seven  to 
six.  Thus  the  bank-guaranty  proposal,  quashed  in  com- 
mittee, never  came  before  the  whole  convention  and  for 
the  time  being  was  forgotten. 

The  events  leading  up  to  the  enactment  of  the  law 
guaranteeing  bank  deposits  in  Oklahoma  are  well  de- 
scribed by  A.  Piatt  Andrew: 

The  idea  was  born  in  Oklahoma  in  the  very  throes  of  the  panic 
of  1907,  after  the  shortest  possible  period  of  gestation.  The  panic, 
it  will  be  remembered,  began  October  28,  1907,  and  it  was  not 
until  three  weeks  later,  on  November  16,  that  Oklahoma  became 
a  state,  and  that  its  first  legislature  began  its  sessions.  Never- 
theless the  panic  was  not  yet  over;  currency  was  still  at  a  premium 
and  clearing-house  certificates  were  still  outstanding  throughout 
the  country  when  the  Oklahoma  legislature  passed  its  famous 
law.  This  first  legislature  of  a  new  state  had  been  in  session  only 
four  weeks  when,  on  December  17,  it  adopted  with  scarcely  any 
debate  a  law  without  precedent  in  any  other  country,  and  with 
but  one  dimly  remembered,  unsuccessful  precedent  in  the  United 
States  —  a  law  which  nevertheless  presented  what  was  probably 
the  most  far-reaching  and  drastic  experiment  in  banking  legisla- 
tion that  had  been  made  anywhere  in  the  world  for  at  least  two 
generations.1 

The  first  law  passed  by  the  initial  legislature  of  this  new 
state  was  Oklahoma's  "Jim  Crow  law."  After  disposing 
of  this  vexed  question  the  legislature  plunged  into  the  con- 
sideration of  bank  guaranty.  A  week  after  the  admission 
of  the  new  state  to  the  Union  the  executive  committee  of 
the  Oklahoma  and  Indian  Territory  Bankers'  Association 
met  in  Guthrie  to  consider  measures  for  the  relief  of  the 
then  existing  money  stringency.  This  committee  drafted 

1  Yale  Review,  July,  1913,  pp.  599-600. 


THE  OKLAHOMA  SYSTEM  23 

resolutions  memorializing  Congress  for  relief,  the  first 
measure  urged  being  a  plan  for  the  guaranty  of  bank  de- 
posits outlined  by  United  States  Senator  Robert  L.  Owen.1 
The  panic  was  at  its  height  when  Governor  Haskell  was 
preparing  his  message.  He  strongly  urged  the  passage  of  a 
guaranty  law  and  even  went  so  far  as  to  outline  the  pro- 
visions of  the  bill  he  had  in  mind.  The  bill  was  introduced 
in  the  House  December  5,  1907,  and  passed  December  13. 
Four  days  later  it  passed  the  Senate  and  almost  immedi- 
ately received  the  approval  of  the  governor.  The  law  was 
to  take  effect  in  sixty  days.  During  its  swift  and  har- 
monious passage  through  the  legislature,  little  patience  was 
manifested  in  either  house  with  attempts  to  amend  the 
bill.  The  only  record  of  any  debate  on  the  bill  is  where  the 
press  reports  state  that  the  House  in  agreeing  to  a  Senate 
amendment  debated  for  an  hour  the  proposition  of  sub- 
stituting the  word  "active"  for  "acting''  in  a  certain 
clause.* 

The  motive  which  prompted  the  enactment  of  the  law 
was  economic  rather  than  political.  With  the  exception  of 
Governor  Haskell,  no  one  person  or  group  of  persons  was 
especially  prominent  in  the  movement.  The  Democratic 
Party  happened  to  be  in  control  of  the  state  machinery 
and  it  assumed  responsibility  for  the  new  law.*  The  panic 
was  a  painful  reality.  Panics  are  caused  by  a  lack  of  con- 
fidence. If  deposits  were  absolutely  safe  there  would  be 
no  lack  of  confidence;  therefore  guarantee  deposits.  Such 
was  the  easy  and  alluring  logic  which  prompted  the  enact  - 

1   The  Guihrif  Daily  Leader.  November  26,  1907,  p.  1. 

1  The  Daily  Oklahoman,  December  17,  1907,  p.  1. 

1  The  Oklahoma  State  Capital,  a  staunch  Republican  paper,  said  edi- 
torially the  day  after  the  enactment  of  the  law:  "The  Williams-Roddie 
bill,  an  act  creating  a  state  banking  department  and  establishing  a  deposi- 
tors' guaranty  fund,  taken  up  as  an  emergency  bill,  is  a  very  needful  law 
and  will  doubtless  do  much  to  allay  the  financial  embarrassment  in  Okla- 
homa." Three  days  later  the  same  paper  said:  "The  law  throughout  is  a 
very  satisfactory  one  to  both  depositors  and  bankers  and  will  help  very 
materially  in  bringing  about  perfect  confidence." 


24      THE  GUARANTY  OF  BANK  DEPOSITS 

ment  of  the  law.  On  the  face  of  it,  this  was  plausible,  and 
the  average  citizen  accepted  the  idea  unhesitatingly.  But 
the  proposition  soon  got  into  politics.  The  country  was 
on  the  eve  of  a  national  election.  Public  approval  of  the 
idea  had  been  so  spontaneous  that  no  local  party  organiza- 
tion dared  to  antagonize  it.  In  1909  Kansas  and  South 
Dakota  adopted  bank-guaranty  laws,  the  Republicans  of 
those  states  being  responsible  for  the  measures.  Early  in 
the  same  year  Nebraska  enacted  such  a  law  and  a  few 
months  later  Texas  followed  suit.  In  the  last  two  states 
the  Democratic  Party  was  in  power  when  the  laws  were 
adopted. 

2.  Experimental  legislation  and  the  frontier.  Here  we 
must  pause  for  a  word  as  to  why  a  nascent  state  like  Okla- 
homa should  or  could  rush  so  cavalierly  into  a  movement 
of  this  kind.  "Oklahoma,"  says  James  Bryce,  "into  which 
settlers  have  swarmed  from  all  parts  of  the  Northwest  as 
well  as  the  Southwest,  is  preeminently  the  land  of  sanguine 
radicalism  and  experimental  legislation."  r  Legislative  te- 
merity seems  to  be  endemic  to  frontier  people.  Witness 
the  Granger  movement  of  the  eighties  and  some  years  later 
the  "surprising  ease  and  swiftness"  of  the  rise  of  the  Popu- 
list Party  calling  for  the  doubling  of  the  currency,  govern- 
ment ownership  of  railroads,  and  other  such  ambitious 
proposals.  It  is  probable  that  the  explanation  of  this  well- 
known  phenomenon  is  to  be  found  in  the  fact  that  a  proc-- 
ess  of  selection  brings  about  on  the  frontier  a  homogene- 
ous group  of  persons  who  have  accumulated  little  of  this 
world's  goods.  Consequently,  when  the  times  become  out 
of  joint  radicalism  has  no  restraint,  for  these  persons  have 
"nothing  to  lose  but  their  chains."  With  the  passage  of 
years  and  the  development  of  natural  resources  wealth 
accumulates,  and  there  comes  into  being  a  class  which, 
because  of  a  zeal  to  conserve  its  accumulations,  has  little 
1  The  American  Commonwealth  (revised  ed.),  vol.  n,  pp.  315-16. 


THE  OKLAHOMA  SYSTEM  25 

to  gain  and  very  much  to  lose  through  political  experimen- 
tation. The  very  fact  that  people  are  on  the  frontier  shows 
that  they  were  restive  under  the  restraints  and  conventions 
of  older  civilizations;  and  Oklahoma  was  the  last  frontier.1 
"There  are  those  who  are  forever  tugging  at  the  leashes  of 
ordered  life,  eager  to  venture  into  the  unknown.  Forsak- 
ing beaten  paths,  they  plunge  into  the  wilderness.  They 
must  be  always  on  the  frontier  of  human  endeavor,  sub- 
mitting what  is  old  and  accepted  to  conditions  that  are  new 
and  untried.  The  frontier  is  thus  the  seed  plot  where  new 
forms  of  life,  whether  of  institutions  or  types  of  thought,  are 
germinated,  the  condition  of  all  progress  being  in  a  sense 
a  return  to  the  primitive."  2  A  great  faith  in  governmental 
activity  is  a  well-known  trait  of  the  American  character, 
and  in  this  respect  the  frontiersman  is  probably  most  typi- 
cally American.  "  The  doctrine  of  equality  is  unquestioned 
there,  and  that  governments  exist  for  the  purpose  of  secur- 
ing it  is  the  common  belief.  *A  Law  Against  It'  is  the 
specific  for  every  malady."  8  When  an  idea  takes  hold  of 
some  one  it  soon  sweeps  the  plains,  for,  as  Bryce  said  of 
the  American  people:  "They  seem  all  to  take  flame  at 

1  The  following  editorial  comment  on  the  new  bank-guaranty  law  by 
the  Guthrie  Daily  Leader  of  December  18,  1007.  is  of  interest  in  this  con- 
nection. It  said:  "Governor  Haskcll  has  made  history.  He  arose  to  the 
occasion  when  the  people  needed  action.  Without  hesitancy,  knowing 
full  well  that  failure  meant  political  ruin,  he  bridged  the  awful  chasm 
between  prosperity  and  calamity,  tearing  loose  from  all  ancient  and  use- 
less customs,  Oklahoma,  thanks  to  a  militant  chief  executive,  steps  to 
the  fore  in  the  banking  world,  and  says  not  only  to  her  own,  but  to  all 
other  people  that  she  will  pledge  her  great,  boundless,  and  widely  diversi- 
6ed  resources  to  the  protection  and  safety  of  their  savings.  Alxn-e  the 
comprehension  of  the  petty  partisans,  the  act  will  be  the  star  of  guidance 
for  ages  to  come,  and  proclaimed  by  the  historian  as  an  art  of  statesman- 
ship undreamed  of  a  year  before  its  adoption  as  law.  Whilst  the  old  re- 
gime was  wailing  and  pleading  for  a  wild-cat,  clastic  currency,  begging 
from  the  very  Federal  Government,  Oklahoma,  through  her  native  re- 
aources,  solved  a  financial  problem  that  was  ages  old,  and  no  other  state 
will  long  dare  refuse  to  follow  in  the  procession." 

1  C.  L.  IJecker,  Turner  Essays  in  American  History,  p.  88;  cf.  also 
M.  S.  Wildman,  Manry  Inflation  in  the  United  States. 

•  C.  L.  Becker,  Ibid.,  p.  1W. 


26      THE  GUARANTY  OF  BANK  DEPOSITS 

once,  because  what  has  told  upon  one  has  told  in  the  same 
way  upon  all  the  rest,  and  the  obstructing  and  separating 
barriers  which  exist  in  Europe  scarcely  exist  here."  1  This 
helps  to  explain  why  Oklahoma  rushed  into  legislation  on 
this  difficult  question  with  a  rapidity  which  almost  took 
the  breath  away  from  older  sections  of  the  country. 

The  people  of  Oklahoma  had  a  definite  and  immediate 
aim  in  view  and  to  accomplish  it  they  invoked  the  aid  of 
legislation.  But  as  it  turned  out,  the  thing  was  not  nearly 
so  simple  as  it  seemed;  for,  as  President  Hadley  says: 
"Legislation  is  essentially  a  matter  of  remote  conse- 
quences." 2  The  lapse  of  over  twelve  years  has  made  it 
possible  to  assess  what  some  of  these  consequences  are. 

3.  The  law  and  its  amendments.  As  originally  passed  the 
Oklahoma  law  was  extremely  crude  and  soon  radical 
amendments  were  found  necessary.  The  law  provided  that 
the  depositors  of  failed  banks  should  be  paid  at  once.  To 
create  a  fund  from  which  to  make  such  payments  an  assess- 
ment was  levied  against  the  capital  stock  of  each  state 
bank  and  trust  company  equal  to  one  per  cent  of  its  aver- 
age daily  deposits.3  If  the  average  deposits  of  any  bank 
should  be  larger  for  the  succeeding  year,  it  was  required 
to  pay  an  assessment  equal  to  one  per  cent  of  the  increase. 
No  provision  was  made  for  keeping  the  fund.  Should  the 
fund  become  depleted  it  was  to  be  recouped  by  means  of 
special  assessments  and  no  limit  was  placed  upon  the 
amount  of  these  special  assessments. 

The  amendment  of  June  11,  1909,  made  some  important 
changes.  It  provided  that  the  guaranty  fund  should  con- 
sist of  five  per  cent  of  the  average  daily  deposits  instead  of 

1  The  American  Commonwealth  (revised  ed.),  vol.  u,  p.  295. 

z  Economics,  p.  17. 

3  This  original  one  per  cent  assessment  was  collected  under  the  follow- 
ing calls:  one  half  per  cent,  February  17, 1908;  one  fifth  per  cent  December 
1, 1908;  one  tenth  per  cent,  September  1, 1908;  one  fifth  per  cent,  December 
SI.  1908. 


THE  OKLAHOMA  SYSTEM  27 

one  per  cent.  The  assessment  was  to  be  one  per  cent  of 
deposits  the  first  year  and  one  fourth  of  one  per  cent  each 
year  thereafter  until  the  five  per  cent  fund  was  accumu- 
lated. The  amendment  of  March  6,  1913,  reduced  the 
guaranty  fund  from  five  per  cent  to  two  per  cent  of  average 
daily  deposits.  The  amendment  of  June  11,  1909,  limited 
the  extra  assessment  of  any  one  year  to  two  per  cent  of 
average  deposits.  This  removed  one  of  the  grave  dangers  of 
the  law  as  first  constituted,  for,  originally,  there  was  no 
limit  as  to  what  might  be  demanded  of  a  bank  in  case  of 
great  losses.  The  last  amendment  with  regard  to  assess- 
ments provides  that  the  annual  assessment  shall  be  one 
fifth  of  one  per  cent  of  average  deposits,  and  no  more. 
During  the  years  1914,  1915,  and  1916  the  state  banking 
board  could  also  levy  annually  an  extra  assessment  of  one 
fifth  of  one  per  cent.  As  the  law  now  stands  one  fifth  of  one 
per  cent  is  the  limit  to  the  regular  annual  assessment,  and 
special  assessments  were  prohibited  after  the  year  1916. ' 
The  amendment  of  June  11,  1909,  also  provided  that  in 
case  the  guaranty  fund  and  the  extra  assessments  failed 
at  any  time  to  meet  the  losses,  then  the  state  banking 
board  should  issue  to  such  unsatisfied  depositors  certifi- 
cates of  indebtedness  bearing  six  per  cent  interest.  As 
soon  as  the  legal  assessments  recouped  the  guaranty  fund 
these  certificates  were  to  be  called  in  and  paid. 

On  the  face  of  it  this  long  rehearsal  of  amendments 
and  re-amendments  may  be  dull  and  uninteresting.  But 
through  it  all  can  be  seen  the  whole  history  of  the  Okla- 
homa experiment  —  a  history  abounding  with  incident 
and  sordidness.  The  initial  idea  was  to  build  up  a  large 
cash  fund  and  by  means  of  oppressive  regular  and  special 
assessments  to  maintain  this  fund  in  the  face  of  the  most 
severe  losses.  This  first  idea  was  gradually  given  up;  the 
large  fund  was  reduced  to  a  relatively  small  one;  the  bur- 
densome assessments  gave  place  to  moderately  light  ones; 
1  Banking  Lavs  of  the  Statt  of  Oklahoma,  section  46. 


28      THE  GUARANTY  OF  BANK  DEPOSITS 

and  in  case  of  an  emergency  the  banking  board  obtains 
cash  by  the  sale  of  interest-bearing  certificates  in  the  open 
market.  Light  assessments  over  a  period  of  years  were  re- 
lied upon  ultimately  to  liquidate  these  certificates. 

So  far  we  have  enumerated  only  those  provisions  and 
changes  in  the  law  which  govern  the  creation  of  the  guar- 
anty fund.  It  is  necessary  further  to  show  how  this  fund  is 
kept,  the  composition  of  the  state  banking  board,  and  other 
provisions  for  the  administration  of  the  law. 

The  amendment  of  June  11, 1909,  provided  that  seventy- 
five  per  cent  of  the  guaranty  fund  should  be  invested  in 
state  warrants  or  other  such  securities,  the  remainder  being 
held  by  the  state  banking  board  as  a  ready  fund.  In  1911 
the  law  was  further  amended  in  regard  to  the  custody 
of  the  fund.  Now  the  Oklahoma  banks  pay  their  assess- 
ments to  the  guaranty  fund  by  means  of  non-interest- 
bearing  cashiers'  checks.  These  checks  are  held  by  the 
state  banking  board  until  needed,  thus  for  the  time  being 
giving  the  bank  the  use  of  its  own  assessment.  To  secure 
its  liability  to  the  guaranty  fund  each  bank  is  required  to 
deposit  with  the  banking  board  bonds  or  warrants  equal  to 
one  per  cent  of  its  deposits,  but  not  less  than  five  hundred 
dollars  in  any  instance.1 

Another  vital  change  which  has  been  made  concerns 
the  composition  of  the  state  banking  board.  This  board 
administers  the  guaranty  law  and  is  the  custodian  of 
the  guaranty  fund.  The  original  law  provided  that  the 
board  should  consist  of  the  governor,  the  lieutenant-gov- 
ernor, the  president  of  the  board  of  agriculture,  the  state 
treasurer,  and  the  state  auditor.  As  will  be  seen,  the  com- 
position of  this  board  was  purely  political  and  the  evidence 
seems  pretty  conclusive  that  its  administration  of  the  law 
was  likewise  purely  political.  When  the  losses  began  to 
threaten  the  Oklahoma  system  the  banks  sought  to  have 
the  personnel  of  this  board  changed.  They  wanted  to  re- 
1  Banking  Laws  of  the  State  of  Oklahoma,  section  48. 


THE  OKLAHOMA  SYSTEM  29 

move  the  board  from  the  influence  of  politics,  and,  at  the 
same  time,  get  it  into  the  hands  of  men  especially  trained 
for  this  business.  They  proposed,  therefore,  that  if  the 
board  should  be  placed  in  the  hands  of  the  bankers  them- 
selves, their  representatives  would  serve  without  pay. 
This  proposal  was  accepted  in  the  amendment  of  March  6, 
1913,  and  now  the  state  banking  board  is  composed  in  the 
following  way.  Each  state  bank  has  one  representative  in 
the  State  Bankers'  Association.  This  association  selects  an 
executive  council  of  not  less  than  nine  or  more  than  fifteen 
members.  This  council  recommends  to  the  governor  the 
names  of  nine  persons  from  which  to  select  three  members 
of  the  board.  The  three  persons  chosen,  together  with  the 
bank  commissioner  and  the  assistant  bank  commissioner, 
constitute  the  state  banking  board.1  The  duty  of  this 
board  is  "to  keep  an  account  of  the  collection  of  the  de- 
positors' guaranty  fund,  showing  all  collections  from  assess- 
ments and  assets  of  failed  banks,  and  from  all  other  sources, 
together  with  the  disbursements  of  said  fund  and  certifi- 
cates of  indebtedness  outstanding  or  other  obligations 
chargeable  against  the  same,  and  to  send  each  bank  operat- 
ing under  the  laws  of  this  state  a  quarterly  financial  state- 
ment showing  the  exact  condition  of  the  depositors'  guar- 
anty fund."  2 

In  case  of  insolvency  the  bank  commissioner  takes  charge 
of  the  bank;  or,  if  he  is  satisfied  that  the  bank  is  insolvent, 
he  may,  after  due  examination,  take  possession  and  liqui- 
date it.  The  depositors  are  paid  in  full  out  of  the  available 
cash.  If  this  is  not  sufficient  the  banking  board  draws  upon 
the  guaranty  fund,  and  if  necessary  makes  additional 
assessments.  However,  as  noted  previously,  these  emer- 
gency assessments  have  ceased  since  the  year  1016.  The 
bank  commissioner  then  proceeds  to  liquidate  the  failed 
bank,  and  as  the  assets  arc  realized  upon  he  pays  back  to 

1  Banking  /xiiAt  of  the  State  of  Oklahoma,  section  43. 
1  Ibid.,  section  46. 


30      THE  GUARANTY  OF  BANK  DEPOSITS 

the  guaranty  fund  what  was  taken  from  it  to  pay  deposi- 
tors. If  a  special  assessment  was  made  this  is  also  paid 
back.1  If  what  is  realized  from  the  assets  of  the  failed  bank 
is  not  sufficient  to  pay  back  to  the  guaranty  fund  what  was 
taken  from  it  to  pay  the  depositors,  then  the  fund  must 
stand  the  loss.  Should  the  guaranty  fund  together  with  the 
special  assessments  be  insufficient  to  pay  the  depositors  of 
the  failed  banks,  then  the  banking  board  is  directed  by  law 
to  issue  certificates  of  indebtedness  bearing  six  per  cent 
interest.  At  first  the  board  was  permitted  to  issue  these 
only  to  depositors,  but  now  it  may  issue  them  to  the  public 
at  large,  thus  borrowing  money  on  the  credit  of  the  guar- 
anty fund  to  pay  depositors.  These  warrants  "shall  con- 
stitute a  charge  and  first  lien  against  the  capital  stock, 
surplus,  and  undivided  profits  of  each  and  every  bank 
operating  under  the  banking  laws  of  the  State  of  Okla- 
homa, to  the  extent  of  liability  of  any  such  bank  to  the 
depositors'  guaranty  fund  under  the  provisions  of  this 
act."  2 

The  original  law  covered  all  deposits,  but  now  deposits 
otherwise  secured  are  not  protected  by  the  fund.3  No 
deposit  is  protected  on  which  a  greater  rate  of  interest 
is  paid  than  that  allowed  by  the  bank  commissioner.4 
This  rate  is  now  placed  at  four  per  cent.  Trust  compa- 
nies were  included  by  the  first  law,  but  in  1911  their 
deposits  were  excluded  from  the  protection  of  the  fund. 
When  a  bank  is  organized  it  must  pay  three  per  cent  of  its 
capital  stock  to  the  guaranty  fund.  At  first  this  amount 
was  subject  to  adjustment  at  the  end  of  the  first  year  on 
the  basis  of  average  daily  deposits,  but  this  was  later 
changed  and  now  this  three  per  cent  assessment  is  one  of 
the  costs  of  organizing  a  new  bank.  When  a  bank  complies 
with  the  law  the  bank  commissioner  issues  to  it  a  certificate 
stating  that  its  deposits  are  guaranteed  by  the  depositors' 

1  Banking  Laws  of  the  State  of  Oklahoma,  section  63. 

2  Ibid.,  section  46.  8  Ibid.,  section  49.  *  Ibid.. 


THE  OKLAHOMA  SYSTEM  31 

guaranty  fund  of  Oklahoma.  The  bank  is  allowed  to  dis- 
play this  certificate  in  its  place  of  business,  but  it  is  not 
permitted  to  advertise  that  its  deposits  are  guaranteed  by 
the  State  of  Oklahoma.1 

This  long  delineation  of  the  evolution  of  the  present 
Oklahoma  law  gives]us  an  idea  of  the  complete  transforma- 
tion which  twelve  stormy  years  of  its  operation  have  made 
imperative.  This  law  has  two  outstanding  characteristics 
which  have  been  dominant  factors  in  the  Oklahoma  ex- 
perience. First,  the  law  is  compulsory.  All  state  banks 
must  qualify  and  come  under  its  provisions.  Second,  de- 
positors are  paid  at  once.  These  are  the  two  mooted  points 
in  the  bank  guaranty  laws  of  the  seven  states,  and  these 
two  principles  are  largely  responsible  for  the  peculiar 
working  of  each  system. 

4.  Insurance  phases  of  the  law.  So  far  we  have  spoken  of 
the  "guaranty  "  of  bank  deposits.  But  now  with  the  provi- 
sions of  the  Oklahoma  law  before  us,  attention  should  be 
called  to  the  fact  that  the  scheme  is  essentially  a  matter  of 
insurance.  It  is  a  compulsory  insurance  company  admin- 
istered by  the  state.  We  must  now  consider  whether  bank- 
deposit  insurance  is  scientific  insurance  within  the  meaning 
of  that  term  as  used  in  the  three  great  branches  of  insur- 
ance, namely,  life,  fire,  and  marine.  The  constant  aim  of 
well-administered  insurance  is  to  secure  a  homogeneous 
group.  Such  a  group  is  obtained  by  classifying  like  risks 
into  their  respective  classes.  The  purpose  of  this  is  two- 
fold. From  the  standpoint  of  administration  it  is  much 
easier  to  determine  accurately  the  risk  to  which  a  group  so 
selected  is  subject;  from  the  standpoint  of  the  distribution 
of  the  costs  and  the  benefits  of  the  insurance  it  is  infinitely 
more  equitable  to  the  meml)ers  of  the  group.  Scientific 
insurance  selects  risks  and  charges  a  different  rate  for  each 
class  of  risk.  Any  human  risk  can  be  insured  if  you  have 
1  Banking  Laics  of  the  State  of  Oklahoma,  section  65. 


32      THE  GUARANTY  OF  BANK  DEPOSITS 

the  data  to  show  what  the  risk  is.  We  have  said  that  scien- 
tific insurance  selects  risks  and  makes  a  different  rate  for 
each  class. 

Bank-deposit  insurance  in  Oklahoma  forces  all  the  banks 
into  the  company  and  then  charges  the  same  rate  to  all. 
Does  this  violate  the  requirements  of  scientific  insurance? 
If  so,  is  it  not  unsound  and  consequently  doomed  to  ulti- 
mate failure?  On  the  face  of  it  it  would  seem  so.  But,  while 
the  state  forces  all  banks  to  join  the  system,  it  really  does 
make  some  selection  of  risk  by  means  of  its  rigid  supervi- 
sion of  the  banks.  State  supervision  is  supposed  to  estab- 
lish a  minimum  standard  and  then  charge  a  uniform  rate. 
If  the  system  is  properly  administered,  certainly  bank- 
deposit  insurance  is  as  "scientific"  as  most  of  the  haphaz- 
ard guesswork  which  in  the  past  has  determined  much  of 
our  fire  and  marine  insurance  rates.  Life  insurance  is  the 
most  scientific  insurance  we  have,  and  while  no  two  banks 
were  ever  created  equal,  it  is  also  well  known  that  no  two 
lives  are  an  equal  risk  to  the  insurance  company.  The  life 
insurance  company  by  means  of  a  medical  examination 
tries  also  to  establish  a  minimum  requirement  at  each  age, 
and  then  by  means  of  its  mortality  table  establishes  rates 
for  these  different  ages  based  on  the  average  experience. 
After  this  is  done  it  permits,  for  the  most  part,  the  insured 
to  govern  his  own  life,  relying  for  its  protection  on  the  law 
of  self-preservation.  In  bank-deposit  insurance  there  is  a 
similar  selection  made.  The  state,  in  its  supervision  of 
banking,  lays  down  very  definite  moral  and  ethical  stand- 
ards for  men  who  are  permitted  to  engage  in  the  business. 
This  standard  may  be  just  as  severe  as  any  physical  stand- 
ard a  life  insurance  company  may  impose.  The  state  has 
also  copious  statistics  of  bank  failures  from  which  it  can 
determine  the  risk  involved.  Finally,  when  a  bank  is  char- 
tered, it  is  not  turned  loose  to  run  as  it  will,  but  by  a  sys- 
tem of  periodic  examinations  and  reports  it  is  kept  under 
the  constant  surveillance  of  the  state.  Since  the  age  ele- 


THE  OKLAHOMA  SYSTEM  33 

ment  is  of  no  consequence  in  bank-deposit  insurance,  it 
would  seem,  therefore,  that  it  is  little  less  scientific  than 
life  insurance  itself.  Of  course,  the  equity  or  the  desirabil- 
ity of  compulsory  deposit  insurance  is  another  matter. 

It  is  sometimes  argued  that  bank-deposit  insurance  is 
doomed  to  failure  because  it  is  assessment  insurance.  That 
is,  it  does  not  build  up  a  reserve  fund  which,  placed  at 
compound  interest,  is  sufficient  to  meet  each  loss  as  it  oc- 
curs. Confusion  arises  here  in  not  recognizing  certain  vital 
differences  between  life  and  bank-deposit  insurance.  All 
the  world  is  acquainted  with  the  wreckage  of  assessment 
life  insurance  companies.  Such  life  insurance  companies 
are  disappointments  because  of  the  fact  of  increase  of  risk 
with  increase  in  age.  The  assessments  are  low  when  the 
company  is  first  organized  because  the  risks  are  at  a  very 
favorable  stage.  As  the  company  grows  older  the  group  of 
lives  forming  it  also  increases  in  age  and  consequently  the 
assessments  mount  upward  until  they  become  intolerable. 
The  age  element  does  not  affect  a  bank.  If  anything,  the 
older  a  bank  gets  the  better  risk  it  should  be.  It  is  evident, 
therefore,  that  there  is  no  foundation  for  this  fear  of  assess- 
ment bank-deposit  insurance. 

But  bank-deposit  insurance  does  have  its  drawbacks. 
With  the  possible  exception  of  life  insurance  all  insurance 
has  a  tendency  to  relax  the  vigilance  of  the  party  insured. 
If  a  house  is  heavily  insured  against  fire  it  seems  to  be 
human  nature  that  the  average  man  will  not  exercise  the 
same  care  as  when  there  is  no  insurance.  For  the  same 
reason  the  average  banker,  knowing  that  his  custom- 
ers can  suffer  no  loss,  will  surely  be  less  careful  than  he 
otherwise  would  be.  But  even  on  this  score  between  fire 
and  bank-deposit  insurance  the  advantage  is  all  with  the 
latter.  When  a  man's  house  burns  his  house  is  gone,  but  he 
has  his  insurance;  when  a  bank  breaks  the  banker's  depos- 
itors are  safe,  but  his  stock  is  worthless  and  his  reputation 
is  gone.  It  will  also  have  the  tendency  to  destroy  the  vigi- 


34      THE  GUARANTY  OF  BANK  DEPOSITS 

lance  of  the  depositor  himself.  But  the  ability  of  the  ordi- 
nary depositor  to  judge  the  solvency  of  his  bank  has  been 
greatly  exaggerated  in  public  discussions.  It  is  well  known 
that  it  often  takes  the  trained  bank  examiner  some  time  to 
find  out  the  true  condition  of  a  bank.  To  the  ordinary  de- 
positor the  ways  of  modern  banking  are  past  finding  out, 
and  he  is  consequently  forced  to  rely  largely  on  the  super- 
vision of  the  government. 

A  more  serious  drawback  to  bank-deposit  insurance  is 
the  danger  of  a  concentration  of  risk.  In  a  state  where  the 
economic  life  and  most  bank  loans  of  the  people  rest  on  an 
agricultural  foundation,  a  long  series  of  crop  failures  may 
cause  such  a  shrinkage  in  assets  as  to  precipitate  serious 
bank  failures.  This  is  the  drawback  to  a  state  guaranty 
system.  The  state  lines  fence  in  a  restricted  area  and  then  a 
local,  intestine  disturbance  causes  a  great  concentration  of 
risk.  This  is  like  a  fire  insurance  company  writing  too 
many  of  its  policies  in  one  city  or  in  one  block.  This  objec- 
tion is  of  more  than  theoretical  importance,  as  will  be  seen 
when  we  come  to  consider  the  relation  of  protracted  crop 
failures  in  that  section  of  the  country  to  Oklahoma's  fifty- 
odd  bank  failures.  A  national  bank-guaranty  system 
would  lessen  this  danger,  for  with  the  diversified  economic 
life  of  the  country  an  unfavorable  experience  in  one  section 
would  tend  to  be  offset  by  a  favorable  one  in  some  other. 

5.  The  law  in  the  courts.  The  Oklahoma  law  as  passed  in 
1907  applied  only  to  state  banks,  but  the  national  banks 
operating  in  the  state  were  permitted  to  enjoy  its  privileges 
on  the  fulfillment  of  all  the  requirements  of  the  law.  Since 
the  guaranty  idea  was  popular  with  the  people  the  national 
banks  felt  that  unless  they  entered  the  system  the  state 
banks  would  have  an  undue  advantage.  Consequently  by 
August  1,  1908,  fifty-seven  national  banks  had  elected  to 
comply  with  the  state  law.1  This  movement  was  stopped 
1  First  Annual  Report  of  the  Bank  Commissioner,  1908,  p.  ix. 


THE  OKLAHOMA  SYSTEM  35 

on  the  above  date  by  an  opinion  handed  down  by  At- 
torney-General Bonaparte,  denying  the  right  of  a  national 
bank  to  take  advantage  of  the  law.  He  held  that  the  Okla- 
homa law  required  a  bank  to  guarantee  the  obligation  of  a 
third  party,  and  that  this  privilege  was  denied  a  national 
bank  by  the  national  banking  laws.1  This  opinion  of  the 
Attorney-General  struck  terror  into  the  camp  of  the  na- 
tional banks,  and  many  of  them,  while  not  believing  in  the 
economic  soundness  of  the  law,  renounced  their  national 
charters  and  incorporated  under  the  state  laws.  Deposit 
guaranty  proved  so  popular  with  the  masses  that  this 
movement  continued  until  the  great  avalanche  of  bank 
failures  in  1910  and  1911  put  an  end  to  it. 

The  law  had  scarcely  gone  into  operation  before  it  was 
required  to  run  the  gantlet  of  the  courts.  Almost  at  once 
the  Noble  State  Bank  asked  the  district  court  of  Logan 
County  for  an  injunction  restraining  the  state  banking 
board  from  levying  the  first  assessment.  The  main  conten- 
tions of  the  Noble  State  Bank  were,  first,  that  the  state 
legislature  had  no  power  to  modify  its  charter,  and,  second, 
that  a  law  requiring  it  to  contribute  toward  making  good 
the  debts  of  a  third  party  was  depriving  it  of  its  property 
without  due  process  of  law  and  therefore  unconstitutional. 
The  local  court  denied  the  injunction,  whereupon  the  case 
was  appealed  to  the  State  Supreme  Court.  On  September 
11,  1908,  Chief  Justice  Williams  of  this  court  handed  down 
a  decision,  representing  the  unanimous  opinion  of  the 
court,  upholding  the  decision  of  the  lower  court.2  The  con- 
tention that  the  legislature  had  no  power  to  modify  the 
bank's  charter  harks  back  to  the  now  famous  Dartmouth 
College  case.  But  Justice  Williams  showed  clearly  in  his 
decision  that  the  Indian  Territory  constitution  under 
which  the  above  bank  was  chartered  contained  the  provi- 
sion that  "Every  grant  of  corporate  power  is  subject  to 

1  Quarterly  Journal  of  F.<vmomic»,  1909.  24:90. 

1  Noble  State  Hank  r.  LLukcll,  22  Oklahoma.  43.  72. 


36      THE  GUARANTY  OF  BANK  DEPOSITS 

alteration,  suspension,  or  repeal,  in  the  discretion  of  the 
legislature,"  and  further  that  the  Oklahoma  state  consti- 
tution under  which  the  bank  was  then  operating,  con- 
tained substantially  the  same  provision.  On  the  second 
point,  however,  the  Noble  State  Bank  was  not  satisfied 
and  at  once  appealed  the  case  to  the  United  States  Su- 
preme Court.  Early  in  January,  1911,  Justice  Holmes  of 
this  court  handed  down  an  opinion,  which  was  fully  con- 
curred in  by  all  the  other  judges,  upholding  the  constitu- 
tionality of  the  law.  The  principal  point  at  issue  was  that 
by  this  law  the  state  took  private  property  of  one  bank  for 
the  private  use  of  another  bank  without  compensation.  In 
the  course  of  his  opinion  Justice  Holmes  said: 

The  only  contract  that  it  [the  bank]  relies  upon  is  its  charter. 
That  is  subject  to  alteration  or  repeal,  as  usual,  so  that  the  obli- 
gation hardly  could  be  said  to  be  impaired  by  the  act  of  1907  be- 
fore us,  unless  that  statute  deprives  the  plaintiff  of  liberty  or 
property  without  due  process  of  law.  Whether  it  does  so  or  not 
is  the  only  question  in  the  case. 

In  answering  that  question,  we  must  be  cautious  about  pressing 
the  broad  words  of  the  Fourteenth  Amendment  to  a  drily  logical 
extreme.  Many  laws  which  it  would  be  vain  to  ask  the  court  to 
overthrow  could  be  shown,  easily  enough,  to  transgress  a  scho- 
lastic interpretation  of  one  or  another  of  the  great  guaranties  in 
the  Bill  of  Rights.  They  limit  more  or  less  the  liberty  of  the  indi- 
vidual, or  they  diminish  property  to  a  certain  extent.  .  .  . 

The  substance  of  the  plaintiff's  argument  is  that  the  assess- 
ment takes  private  property  for  private  use  without  compensa- 
tion. And  while  we  should  assume  that  the  plaintiff  would  retain 
a  reversionary  interest  in  the  contribution  to  the  fund,  so  as  to  be 
entitled  to  a  return  of  what  remained  of  it  if  the  purpose  were 
given  up,  still  there  is  no  denying  that  by  this  law  a  portion  of  its 
property  might  be  taken  without  return,  to  pay  debts  of  a  failing 
rival  in  business.  Nevertheless,  notwithstanding  the  logical  form 
of  the  objection,  there  are  more  powerful  considerations  on  the 
other  side.  In  the  first  place,  it  is  established  by  a  series  of  cases 
that  an  ulterior  public  advantage  may  justify  a  comparatively 
insignificant  taking  of  private  property  for  what,  in  its  immediate 
purpose,  is  a  private  use.  And  in  the  next,  it  would  seem  that 
there  may  be  other  cases  besides  the  everyday  one  of  taxation, 


THE  OKLAHOMA  SYSTEM  37 

in  which  the  share  to  each  party  in  the  benefit  of  a  scheme  of 
mutual  protection  is  sufficient  compensation  for  the  correlative 
burden  that  it  is  compelled  to  assume.  At  least,  if  we  have  a 
case  within  the  reasonable  exercise  of  the  police  power  as  above 
explained,  no  more  need  be  said.  .  .  .  We  cannot  say  that  the 
public  interests  to  which  we  have  adverted,  and  others,  are  not 
sufficient  to  warrant  the  state  in  taking  the  whole  business  of 
banking  under  its  control.  On  the  contrary,  we  are  of  the  opinion 
that  it  may  go  on  from  regulation  to  prohibition  except  upon  such 
conditions  as  it  may  prescribe.  In  short,  when  the  Oklahoma 
legislature  declares  by  implication  that  free  banking  is  a  public 
danger,  and  that  incorporation,  inspection,  and  the  above- 
described  cooperation  are  necessary  safeguards,  this  court  cer- 
tainly cannot  say  that  it  is  wrong.1 

6.  The  nature  of  the  banks  insured.  The  law  was  to  go 
into  effect  February  14,  1908.  The  nature  of  the  risk  in- 
volved is  of  prime  importance  in  any  matter  of  insurance. 
For  this  reason  it  is  necessary  to  pause  for  a  moment  in 
order  to  get  before  the  reader  a  clear  conception  of  the  na- 
ture of  the  banks  whose  deposits  were  insured  by  this  law. 
"The  banker  and  the  saloon-keeper  were  the  first  men  on 
the  spot  as  a  new  railroad  was  pushed  forward  and  a 
town-site  laid  out.  The  banker  opened  up  in  a  tent  with 
his  vest  pockets  as  his  safe.  He  took  in  money  for  safe- 
keeping and  often  charged  high  rates  for  keeping  his  neigh- 
bors' money.  Sometimes  he  had  men  with  Winchesters 
stationed  around  his  place  to  protect  it."  Such  was  the 
beginning  of  banking  in  Oklahoma  as  descril>ed  to  the 
writer  by  an  early  territorial  bank  commissioner.  From 
this  crude  beginning  the  banking  system  at  the  time  of 
statehood  was  the  result  of  a  process  of  development.  The 
nature  and  condition  of  these  banks  we  must  examine 
more  closely. 

In  Indian  Territory  prior  to  1901  no  provision  was  made 
for  banking  corporations  other  than  the  national  banks. 
In  this  territory  the  Five  Civilized  Tribes  were  under  the 

1  Noble  State  Bank  r.  Haskell.  219  U.S.  lit,  110-17. 


38      THE  GUARANTY  OF  BANK  DEPOSITS 

control  of  the  Department  of  the  Interior  with  the  result 
that  local  government  was  tribal  except  where  village  gov- 
ernment was  permitted  by  the  Indian  agent.  With  the 
exception  of  the  national  banks,  which,  of  course,  operated 
in  both  territories,  the  banking  in  this  territory  was  of  a 
private  nature.  A  few  men  would  get  together  and  advance 
a  little  money,  buy  a  safe  and  some  office  furniture,  and 
start  business.  They  borrowed  their  funds  from  older 
banks  and  reloaned  them  to  local  parties  at  greatly  en- 
hanced rates  of  interest.  As  time  went  on  they  gathered  in 
some  local  deposits  which  were  loaned  at  will,  for  the  banks 
were  subject  to  no  more  regulation  than  grocery  stores. 
On  February  18,  1901,  the  President  approved  an  act  of 
Congress  which  extended  the  general  corporation  law  of 
Arkansas  to  the  Indian  Territory.  Arkansas  had  nothing 
to  do  with  the  administration  of  the  law,  the  law  being  ad- 
ministered by  the  United  States  courts.  It  is  probable  that 
the  Arkansas  law  was  taken  as  the  two  political  bodies 
were  contiguous  and  many  of  the  people  of  the  Indian 
Territory  had  come  over  from  Arkansas  and  were  familiar 
with  the  Arkansas  law.  Banks  that  desired  to  incorporate 
did  so,  those  that  did  not  care  to  do  so  did  not.  The  banks 
that  were  chartered  were  given  no  further  regulation,  and 
the  unorganized  banks  had  also,  of  course,  no  regulation. 
Loans  were  made  in  large  part  on  chattel  mortgage  — 
that  is,  on  stock,  farm  implements,  crops,  etc.  Not  many 
loans  were  placed  on  real  estate  for  the  simple  reason  that 
the  Indian  could  not  dispose  of  his  land  and  consequently 
could  not  mortgage  it.  In  making  loans  it  was  inevitable 
that  these  "bankers"  must  often  assume  great  risk,  and 
men  conversant  with  conditions  in  those  days  estimate 
that  the  interest  rate  probably  averaged  thirty-five  per 
cent.  Such  was  the  general  banking  situation  in  the  Indian 
Territory  for  a  period  immediately  preceding  statehood. 

As  regards  Oklahoma  Territory  the  situation  was  some- 
what different.  In  1889  occurred  the  first  opening  of  land 


THE  OKLAHOMA  SYSTEM  39 

in  this  section  of  the  country,  and  the  following  year  a 
territory  was  organized  with  its  own  legislature.  The  execu- 
tive officers  were  appointed  by  the  Federal  Government. 
This  territory  took  its  statute  law  from  various  sources, 
but  its  corporation  law  was  drawn  largely  from  Nebraska. 
In  1897  a  banking  law  was  passed  requiring  banks  to  in- 
corporate and  placing  them  under  the  direction  of  a  com- 
missioner. Many  very  able  and  conscientious  men  served 
as  territorial  bank  commissioners,  but  their  work  was  gen- 
erally crippled  for  the  want  of  adequate  funds.  A  few  facts 
taken  from  the  Third  Biennial  Report  of  this  commissioner 
will  show  some  of  the  difficulties  under  which  they  were 
laboring.  In  the  two-year  period,  1900-02,  four  different 
men  occupied  the  office  of  commissioner.  This  commis- 
sioner had  not  only  to  care  for  the  routine  of  his  own 
office,  but  also  personally  to  organize  the  new  banks  and 
make  all  the  bank  examinations.  In  these  two  years  one 
hundred  and  twenty-four  new  banks  were  opened  for  busi- 
ness, and  the  funds  at  the  disposal  of  the  commissioner 
consisted  of  five  hundred  dollars  with  which  to  cover  office 
rent,  office  supplies,  and  traveling  expenses.  Regarding 
this  condition  the  commissioner  said: 

The  banks  have  been  increasing  in  numbers  so  rapidly  that  to 
visit  each  one  personally  and  conduct  the  large  correspondence  of 
the  department,  attend  to  the  opening  of  the  new  banks  under 
proper  requirements,  is  rendered  a  matter  of  great  difficulty,  and 
to  give  to  the  business  the  attention  and  care  it  demands  and 
ought  to  receive  is  practically  out  of  the  question.1 

Many  of  these  new  institutions  were  anything  but  strong 
banks  as  the  following  quotation  from  the  bank  commis- 
sioner will  show: 

Under  the  present  state  of  the  law  $4500  in  actual  money  is  all 
that  is  required  to  open  a  bank  and  receive  an  unlimited  amount 
of  money  on  deposit,  and  a  one-third  portion  of  that  grossly  in- 

1  Third  Biennial  Report  of  the  Territorial  Bank  Commissioner,  190O-O4, 
p.  tS. 


40      THE  GUARANTY  OF  BANK  DEPOSITS 

adequate  sum  may  immediately  after  opening  be  invested  in  real 
estate  or  fixtures.1 

We  see,  therefore,  that  there  was  a  semblance  of  banking 
organization  and  supervision  in  Oklahoma  Territory  before 
statehood,  but  the  conclusion  must  not  be  drawn  that 
banking  practices  were  consonant  with  those  in  older 
states  where  conditions  were  more  settled  and  where  the 
state  banks  were  of  much  larger  capitalization  and  under 
the  direction  of  a  well-organized  banking  department  with 
a  corps  of  expert  bank  examiners. 

Such  was  the  general  situation  in  the  two  territories 
prior  to  November  16, 1907.  Statehood  attempted  to  weld 
these  two  incongruous  civilizations,  and  a  few  weeks  later 
the  bank-guaranty  law  threw  a  blanket  insurance  over  all 
the  banks.  Before  the  law  should  go  into  effect  the  state 
banking  department  deemed  it  expedient  to  have  an  ex- 
amination of  the  banks  made.  This  examination  is  of 
special  interest  because  to  it  we  can  trace  the  beginning  of 
Oklahoma's  tribulation.  The  state  had  no  machinery  for 
making  this  examination,  so  the  governor  by  telephone 
appointed  thirty-one  bankers  over  the  state  as  special 
examiners.2  These  thirty-one  special  examiners  may  have 
been  good  bankers,  but  they  were  not  trained  bank  ex- 
aminers, and  training  is  the  most  important  thing  in  the 
make-up  of  an  alert  and  efficient  bank  examiner.  It  was 
rather  sophomoric  on  the  part  of  the  state  administration 
to  attempt  to  make  an  examination  in  the  space  of  a  few 
days,  for  it  often  takes  even  a  trained  examiner  some  time 
to  ascertain  the  true  condition  of  a  bank.  Furthermore, 
being  without  machinery  for  the  purpose,  the  examiners 
had  no  well-defined  standards  to  guide  them.  The  result 
was  only  what  might  have  been  expected.  Concerning  this 
examination  the  bank  commissioner  said: 

1  Third  Biennial  Report  of  the  Territorial  Bank  Commissioner,  1900-02, 
pp.  22-23. 

*  First  Annual  Report  of  the  Bank  Commissioner,  1908,  p.  viii. 


THE  OKLAHOMA  SYSTEM  41 

On  account  of  the  unfavorable  financial  situation  at  this  time 
it  was  extremely  difficult  in  many  instances  to  meet  every  re- 
quirement immediately.  If  the  bank  was  solvent  and  showed  a 
disposition  to  comply  with  the  law  as  promptly  as  possible,  the 
department  endeavored  to  be  fair  and  give  them  an  opportunity. 
.  .  .  While  a  large  number  of  banks  were  technically  not  in  har- 
mony with  every  provision  of  the  banking  laws,  their  general 
condition  was  such  that  the  department  did  not  feel  justified  in 
closing  them  and  upon  their  promise  to  correct  the  objection- 
able features  of  their  business  they  were  allowed  to  continue  in 
operation.1 

But  this  description  of  the  condition  of  the  banks  was 
far  too  roseate.  It  is  now  well  known  that  a  goodly  number 
of  banks,  especially  on  the  Indian  Territory  side,  were 
positively  insolvent.  In  1911  J.  C.  McClelland,  a  member 
of  the  state  banking  board,  said  regarding  these  banks : 

The  condition  of  the  banks  in  the  State  of  Oklahoma  at  the 
time  the  guaranty  law  went  into  effect  was  most  deplorable,  and 
there  were  a  number  of  banks  which  were  allowed  to  come  under 
the  wing  of  protection  of  the  guaranty  fund  that  should  never 
have  been  admitted.  A  great  many  of  these  banks  have  changed 
hands,  and  there  are  still  some  of  these  same  banks  that  cause  the 
department  more  or  less  anxiety,  and  are  a  source  of  constant 
care  and  vigilance.* 

The  plain  truth  is,  the  politicians,  who  at  that  time  com- 
pletely dominated  the  banking  board,  did  not  have  the 
courage  to  hew  to  the  line.  The  ordinary  banker  is  ex- 
tremely individualistic.  In  that  part  of  the  world  he  had 
become  used  to  conducting  his  business  in  a  certain  way. 
If  the  proponents  of  bank  guaranty,  in  forcing  this  innova- 
tion upon  him,  had  also  compelled  a  thorough  house-clean- 
ing and  thereafter  a  new  order  of  things,  they  would  have 
incurred  his  lasting  enmity.  And  at  every  turn  we  must 
remember  that  bank  guaranty  was  now  in  politics.  Life 
insurance  companies  give  the  greatest  attention  to  every 

1  Firtt  Annual  Rrport  of  the  Bank  Commissioner,  1908,  pp.  viii-ix. 
1  Proceeding*  of  the   Fifteenth   Annual   Contention  of  the   Oklahoma 
Bankeri  Association,  p.  liO. 


42      THE  GUARANTY  OF  BANK  DEPOSITS 

detail  of  their  medical  examinations.  Oklahoma  was  in 
such  a  hurry  to  get  her  new  scheme  into  operation  that  she 
overlooked  the  importance  of  the  medical  examination. 

7.  Bank  failures.  As  we  have  said,  the  law  went  into 
operation  February  14,  1908.  In  its  first  twelve  years  of 
existence  it  has  had  a  checkered  career.  Since  that  date 
fifty-seven  bank  failures  have  occurred,  involving  a  loss  of 
over  two  and  one  half  million  dollars. 

The  first  bank  to  be  closed  was  the  International  State 
Bank  of  Coalgate,  Oklahoma.  This  was  a  small  bank  with 
deposits  of  $36,744.93.  The  state  banking  board  took  $24,- 
843.73  from  the  guaranty  fund,  added  to  it  the  cash  found 
in  the  vault,  and  paid  the  depositors  at  once.1  When  the 
assets  of  the  bank  were  liquidated  they  reimbursed  the 
guaranty  fund  in  full.  This  is  not  the  interesting  phase  of 
the  failure;  in  fact,  this  bank  is  not  listed  among  the  fifty- 
seven  failures.  What  does  interest  us  is  the  feeling,  quite 
prevalent  in  Oklahoma,  that  the  state  administration 
closed  this  institution  for  political  purposes.  The  bank 
was  closed  May  21,  1908.  Dr.  L.  A.  Conner,  its  president, 
said  regarding  the  closing: 

I  never  will  believe  anything  else  but  that  my  bank  was  closed 
by  Bank  Commissioner  Smock  on  telephone  orders  from  Gover- 
nor Haskell  for  no  other  purpose  than  to  make  a  demonstration 
of  the  depositors'  guaranty  law  for  the  National  Democratic 
Convention  at  Denver.2 

The  fact  that  the  bank  paid  out  dollar  for  dollar  and  that 
it  was  closed  only  a  few  weeks  before  the  Denver  conven- 
tion would  seem  to  lend  color  to  Dr.  Conner's  charge. 
However,  this  Coalgate  bank  was  one  of  the  Indian  Terri- 
tory banks  that  were  technically  not  in  harmony  with  the 
law  when  they  came  into  the  system.3  Furthermore,  the 

1  First  Annual  Report  of  the  Bank  Commissioner,  1908,  pp.  xi-xii. 

2  Quoted  from  a  manuscript  of  V.  E.  Danner. 

*  First  Annual  Report  of  the  Bank  Commissioner,  1908,  p.  ix. 


THE  OKLAHOMA  SYSTEM  43 

bank  persistently  refused  to  get  technically  into  harmony 
with  the  law.  On  February  6  the  bank  commissioner 
ordered  all  officers'  indebtedness  and  stock  loans  taken  up 
and  a  reduction  made  in  the  furniture  and  fixtures  ac- 
count.1 This  the  bank  refused  to  do.  On  May  1,  1908,  a 
special  examiner  was  sent  to  examine  the  bank  and  he 
reported  to  the  bank  commissioner: 

I  find  the  affairs  of  this  bank  in  anything  but  good  condition. 
They  have  not  complied  with  your  instructions  in  any  particular. 
More  than  two  thirds  of  their  paper  is  past  due  and  a  great  ma- 
jority of  the  active  paper  has  been  in  existence  from  one  to  three 
years  and  is  plastered  all  over  the  back  with  extensions.  They 
show  a  loss  now  and  if  they  continue  in  the  same  way  they  will 
show  further  loss.2 

The  bank  commissioner  again  ordered  the  board  to  adjust 
objectionable  features.  This  they  were  unable  to  do,  and 
after  a  few  weeks'  delay  the  bank  was  closed.3  The  tradi- 
tion still  lingers  in  Oklahoma  regarding  the  so-called  coup 
of  the  state  officials  in  closing  this  bank  for  political  effect. 
It  seems  certain,  however,  that  the  bank  deserved  to  be 
closed.  Regardless  of  whether  the  administration  had  an 
ulterior  motive  in  closing  this  bank  at  the  time  it  did,  and 
with  such  order  and  celerity,  it  can  only  be  regretted  that 
later  the  same  summary  methods  were  not  used  with  other 
banks  that  proved  to  be  in  a  much  worse  condition. 

The  first  and  greatest  real  bank  failure  in  Oklahoma  was 
that  of  the  Columbia  Bank  and  Trust  Company  of  Okla- 
homa City.  This  was  the  largest  banking  institution  in  the 
state,  either  state  or  national,  and  its  failure  almost 
wrecked  the  infant  guaranty  system.  The  bank  commis- 
sioner took  charge  of  this  bank  September  28,  1909,  and 
began  at  once  to  pay  depositors  as  required  by  law.  The 
growth  of  this  bank  deserves  careful  consideration.  On 
September  23,  1908,  its  deposits  amounted  to  $365,686.01. 

1  Firai  Annual  Report  of  the  Bank  Commissioner,  1908,  p.  ix. 
*  Ibid.,  p.  xi.  »  Ibid,. 


44      THE  GUARANTY  OF  BANK  DEPOSITS 

By  February  5, 1909,  they  amounted  to  $1,111,805.64,  and 
on  September  1,  1909,  they  were  $2,806,008.61.  Thus  in  a 
little  over  eleven  months  its  deposits  had  increased  by 
nearly  seven  hundred  per  cent. 

Our  first  concern  is  to  show  the  methods  employed  by 
the  officers  of  this  bank  in  building  up  this  deposit  account. 
Mr.  James  K.  Ilsley,  who  accompanied  a  committee  sent 
by  the  State  of  Wisconsin  to  study  the  Oklahoma  system, 
made  the  following  report  in  regard  to  the  history  and  the 
methods  of  the  Columbia  Bank  and  Trust  Company: 

A  controlling  interest  in  this  institution  was  purchased  about 
January  1, 1909,  by  W.  L.  Norton,  H.  H.  Smock,  James  A.  Mene- 
fee,  and  associates.  At  this  time  it  had  less  than  four  hundred 
thousand  dollars  of  deposits;  within  seven  or  eight  months  these 
had  multiplied  more  than  sevenfold,  reaching  nearly  three  million 
dollars,  an  unheard-of  and  startling  gain  in  so  short  a  period. 
How  was  this  accomplished?  Well,  in  about  every  way  that  can 
be  imagined,  legitimate  and  illegitimate.  Norton,  the  president, 
had  been  engaged  in  oil  speculation  in  eastern  Oklahoma  and 
gathered  in  a  considerable  line  of  deposits  from  his  friends  by 
promising  loans  on  easy  terms;  Smock,  the  vice-president,  had 
been  state  bank  commissioner  and  had  used  his  acquaintance  with 
country  bankers  to  obtain  deposits;  Menefee,  a  stockholder,  also 
state  treasurer,  deposited  large  amounts  of  public  funds  directly 
with  the  Columbia  Bank,  and  in  addition  distributed  deposits 
among  the  country  banks  with  a  recommendation  of  the  Columbia 
as  a  reserve  agent  and  a  strong  hint  that  the  opening  of  an  account 
with  this  bank  would  be  appreciated.  Under  the  law  four  per 
cent  had  been  named  as  the  highest  rate  that  state  banks  could 
pay  on  tune  deposits,  but  the  managers  of  the  Columbia  appar- 
ently paid  any  rate  up  to  six  per  cent  and,  in  some  instances,  a  com- 
mission besides.  Now  all  these  and  other  reckless  methods  were 
employed  to  get  business,  but  at  all  times  the  guaranty  law  was 
worked  for  all  it  was  worth,  and  one  cannot  avoid  the  conclusion 
that  this  was  directly  responsible  for  most  of  the  mushroom 
growth.1 

The  major  portion  of  the  deposits  of  this  bank  did  not 
come  from  the  Oklahoma  City  locality.  When  the  Colum- 
1  Chicago  Banker,  February  19,  1910,  p.  17. 


THE  OKLAHOMA  SYSTEM  45 

bia  closed,  it  had  deposit  accounts  aggregating  $1,828,- 
383.79  with  one  hundred  and  nineteen  country  banks.1 
This  remarkable  deposit  account  gives  an  indication  of  the 
influence  which  Mr.  Smock  and  Mr.  Menefee  exerted  with 
the  country  banks.  The  large  individual  deposit  account 
of  the  bank  was  due,  to  a  large  extent,  to  the  personal  mag- 
netism of  Mr.  Norton,  the  president.  He  had  the  happy 
faculty  of  getting  deposits  from  every  one  he  met.  It  is 
said  that  one  day  on  the  train  from  Kansas  City  he  chanced 
to  fall  in  with  a  certain  Missouri  banker.  At  the  close  of 
their  conversation  Mr.  Norton  told  his  new  acquaintance 
that  he  was  interested  in  a  bank  at  Bartlesville  and  one  in 
Tulsa  and  the  president  of  one  in  Oklahoma  City.  The 
Missouri  banker  told  him  he  would  send  him  a  deposit, 
and  in  a  few  days  sent  the  Columbia  $60,000.  Of  him  the 
Wisconsin  committee  said : 

Mr.  Norton  was  not  a  stranger  in  the  state.  He  had  been  for 
something  like  two  years  head  of  the  American-National  Bank  of 
Bartlesville  before  his  connection  with  the  Columbia  Bank  and 
Trust  Company.  He  was  a  clever,  likeable  sort  of  a  fellow  and 
enjoyed  a  reputation  of  being  a  good  business  man.  He  was  a 
phenomenal  business  getter,  and,  it  seems,  was  able  to  control 
a  considerable  amount  of  deposits  from  his  friends  in  the  Bartles- 
ville region.1 

On  September  28  there  was  on  deposit  with  the  Colum- 
bia to  the  credit  of  J.  A.  Menefee,  state  treasurer,  $189,- 
165.10.'  It  is  worthy  of  note  that  this  was  $61,782  in 
excess  of  what  it  was  on  September  1,  twenty-seven  days 
before.  The  commissioner  of  the  school  land  department 
also  had  on  deposit  $190,000  when  the  bank  was  closed.4 
It  is  evident,  therefore,  that  the  bulk  of  the  deposits  of  this 
bank  was  gathered  from  sources  outside  Oklahoma  City. 

What  relation  the  guaranty  law  had  to  the  mushroom 

1  Report  of  the  State  Examiner  and  Inspector,  p.  £83. 

1  Report  of  Special  Committee  on  Ranking,  Wisconsin  Legislature,  p.  10. 

1  Report  of  the.  State  Examiner  and  Inspector,  p.  217.  *  Ibid.. 


46      THE  GUARANTY  OF  BANK  DEPOSITS 

growth  of  this  bank  now  remains  to  be  seen.  On  this  point 
it  is  extremely  difficult  to  get  unbiased  evidence  and  for 
that  reason  we  quote  at  length  from  the  report  to  the  Wis- 
consin legislature  made  by  the  Wisconsin  committee: 

The  largest  bank  in  the  State  of  Oklahoma  on  the  26th  day 
of  September,  1909,  was  the  Columbia  Bank  and  Trust  Company 
of  Oklahoma  City.  This  bank  suspended  and  was  taken  over  by 
the  banking  board  on  the  very  day  of  the  arrival  of  this  com- 
mittee hi  Oklahoma  City,  to- wit:  the  28th  day  of  September, 
1909.  Owing  to  this  circumstance  the  committee  was  particu- 
larly favored  in  its  opportunities  to  observe  the  practical  working 
of  this  law  so  far  as  it  relates  to  the  winding-up  of  the  affairs  of 
a  defunct  bank.  The  committee  spent  a  week  at  this  place  in  the 
immediate  vicinity  of  this  bank  and  had  ample  opportunity  to 
observe  the  effect  of  this  bank's  failure  upon  the  community,  to 
witness  the  manner  in  which  the  process  of  liquidation  of  the 
bank  was  carried  on,  to  note  the  effect  on  the  other  banks,  and  to 
learn  the  manifest  temper  of  the  people  with  reference  to  the 
situation  then  existing  and  with  reference  to  their  confidence  in 
the  guaranty  law  of  that  state. 

W.  L.  Norton,  who  had  formerly  been  president  of  a  national 
bank  at  Bartlesville,  was  president  of  the  Columbia  Bank  and 
Trust  Company  at  the  time  of  its  failure,  and  H.  H.  Smock, 
former  bank  commissioner  of  the  State  of  Oklahoma,  was  vice- 
president.  They  had  controlled  and  managed  this  bank  for  a 
period  of  eight  months  prior  to  its  suspension,  having  with  others 
purchased  it  from  former  owners.  At  the  time  of  its  purchase  by 
the  gentlemen  above  named  it  had  deposits  around  four  hundred 
thousand  dollars.  During  the  course  of  the  eight  months  of  their 
management  the  deposits  reached  as  high  as  three  million  dollars. 
Naturally  the  first  question  arising  from  this  state  of  facts  is, 
How  were  these  men  enabled  to  secure  such  a  rapid  increase  in 
the  deposits  of  the  bank?  This  committee  spent  no  little  time  in 
a  conscientious  effort  to  locate  the  reason  for  this  phenomenal 
growth.  Every  man  who  appeared  before  the  committee  was 
there  questioned  with  a  view  of  determining  whether  this  increase 
in  deposits  could  be  attributed  to  the  guaranty  law,  if  not,  what 
the  real  causes  were  for  the  rapid  increase  of  deposits.  Men  who 
were  violently  opposed  to  the  guaranty  law  and  men  who  enthusi- 
astically favored  it  were  probed  on  this  subject.  It  was  not 
claimed  by  any  one  appearing  before  the  committee  that  the 
guaranty  law  was  entirely  responsible  for  this  increase  of  deposits. 


THE  OKLAHOMA  SYSTEM  47 

Bankers  who  were  bitterly  opposed  would  not  say  that  in  their 
opinion  this  increase  in  deposits  could  be  wholly  attributed  to 
the  guaranty  law;  on  the  other  hand,  it  was  conceded  by  those 
who  favored  the  guaranty  law  that  it  did  have,  without  doubt,  a 
certain  influence  on  the  securing  of  these  deposits.1 

As  the  above  quotation  indicates,  it  is  difficult  to  say 
just  how  far  the  guaranty  system  was  responsible  for  this 
growth.  Governor  Haskell  himself  admitted  in  his  state- 
ment before  the  Wisconsin  committee  that  "probably  the 
bank  could  not  have  shown  such  large  gains  if  it  had  not 
been  for  the  guaranty  law."  2  Mr.  Thornton  Cooke,  a 
close  student  of  the  question,  says  that  the  law  was  not 
responsible  for  the  failure,  but  that  it  was  responsible  for 
the  magnitude  of  it.3  In  Oklahoma  City  the  feeling  is 
quite  prevalent  that  a  public  indifference  to  the  wild-cat 
practices  of  the  officials  of  the  Columbia  permitted  the 
piling-up  of  deposits  far  beyond  what  such  methods  could 
have  effected  without  the  cloak  of  the  guaranty  law. 

Having  considered  the  causes  of  this  bank's  growth  we 
turn  now  to  the  causes  of  its  failure.  The  main  reason  was 
the  fact  that  the  Columbia's  president  was  a  member  of  a 
clique  of  plunging  oil  and  real-estate  speculators,  and  the 
rapidly  accumulating  deposits  of  the  Columbia  were  used 
to  lubricate  their  ventures.  It  will  be  recalled  that  Norton 
was  heavily  interested  in  a  national  bank  in  Bartlesville  as 
well  as  one  in  Tulsa.  These  two  banks  were  in  the  heart  of 
the  oil  fields  and  Norton  and  his  associates  were  financing 
many  of  their  ventures  through  them.  During  the  course 
of  the  summer  preceding  the  Columbia's  failure  Norton 
sold  his  interests  in  these  two  banks  and  personally  guaran- 
teed all  the  oil  paper  connected  with  his  enterprises. 

About  three  months  before  the  failure  of  the  Columbia  Bank 
and  Trust  Company  the  Interior  Department  made  a  ruling  that 

1  Report  of  Special  Committee  on  Banking,  Wisconsin  Legislature,  pp. 
8-9. 

1  Chicago  Banker,  February  19,  1910,  p.  17. 
1  Quarterly  Journal  of  Economic*.  1909,  «4:S37. 


\ 

48      THE  GUARANTY  OF  BANK  DEPOSITS 

the  royalty  on  oil  should  be  increased.1  Simultaneously  with 
this  ruling  the  Standard  made  a  reduction  in  the  price  it  was 
paying  for  oil.  This  combination  sent  a  shock  all  through  the  oil 
fields  that  is  difficult  to  appreciate  by  any  one  not  familiar  with 
the  business  or  the  conditions  existing.2 

For  some  time  the  Comptroller  of  the  Currency  had 
been  suspicious  of  the  oil  paper  held  by  the  Oklahoma  na- 
tional banks.  Alarmed  by  the  conditions  in  the  oil  business 
he  sent  special  examiners  into  eastern  Oklahoma  with  in- 
structions to  charge  off  suspicious  oil  paper  whether  it  was 
due  or  not.  The  result  was  that  most  of  the  paper  of  Nor- 
ton and  his  associates  was  thrown  out  of  the  national 
banks.  This  paper,  ejected  from  the  national  banks,  now 
began  to  appear  thick  and  fast  at  the  Columbia  Bank. 
During  August  and  September  over  $648,000  of  this  oil 
paper  was  dumped  on  the  Columbia,  $175,000  of  this 
amount  coming  from  one  bank.3  When  the  Columbia 
failed  it  had  an  overdraft  account  of  $189,000,  most  of 
these  overdrafts  being  against  companies  in  which  W.  L. 
Norton  was  interested.4  This  strain  was  more  than  the 
resources  of  the  Columbia  could  stand. 

Some  of  this  oil  financing  will  well  repay  closer  scrutiny. 
No  claim  is  made  that  the  following  few  illustrative  items 
represent  a  full  list  of  the  oil  paper  held  by  this  bank.  The 

1  That  is,  on  Indian  land  leases  controlled  by  the  Interior  Department. 

2  Sturm's  Oklahoma  Magazine,  December,  1909,  p.  20. 

8  This  information  was  obtained  from  a  conversation  with  a  man 
whose  official  duties  kept  him  in  close  touch  with  every  phase  of  the  Co- 
lumbia's liquidation.  It  is  understood,  of  course,  that  there  has  been 
much  ill-feeling  in  connection  with  the  guaranty  law  in  Oklahoma,  and 
for  this  reason  it  is  impossible  to  give  the  names  of  many  prominent  busi- 
ness and  professional  men  from  whom  much  of  the  material  for  this  chap- 
ter has  been  obtained.  This  should  be  borne  in  mind,  not  only  at  this 
point,  but  throughout  the  Oklahoma  discussion.  The  danger  of  using  ma- 
terial of  this  kind  is  that  it  is  apt  to  be  biased,  but  the  writer  has  col- 
lated with  considerable  pains  the  testimony  of  the  persons  interviewed 
and  has  tried  to  make  use  of  only  such  statements  as  seem  well  sub- 
stantiated. 

4  Sturm's  Oklahoma  Magazine,  December,  1909,  p.  19. 


THE  OKLAHOMA  SYSTEM  49 

amount  and  the  nature  of  such  paper  held  will  probably 
never  be  known,  for,  as  will  be  seen  shortly,  practically  all 
the  records  of  the  bank  were  destroyed  or  stolen,  and  when 
large  depositors  came  for  their  money  they  were  permitted 
to  go  through  the  note-case  and  select  such  paper  as  they 
wished  to  offset  their  account.  No  records  exist  of  the  de- 
tails of  these  transactions.  However,  a  batch  of  the  bank's 
assets  was  sold  to  Cobe  and  McKinnon,  a  wrecking  con- 
cern of  Chicago,  and  a  copy  of  this  contract  was  found 
among  the  records  of  the  liquidation.  From  the  items  of 
this  contract  we  get  a  glimpse  of  the  nature  of  some  of  this 
paper.  A  few  of  the  items  are  as  follows: l  Leader  Oil  and 
Gas  Company,  $10,400;  Roberts  Oil  Company,  $40,000; 
Exchange  Drilling  Company,  $6020;  Lee  Oil  Company, 
$6946.15;  Conner  Oil  Company,  $1020;  Turtle  Oil  Com- 
pany, $2000;  Twenty-Five  Oil  Company,  $10,000.  Some 
of  the  other  items  were:  James  A.  Menefee,  a  stockholder, 
and  the  state  treasurer,  $11,021.67;  Margaret  McKinley, 
a  noted  speculator  of  whom  we  shall  hear  more  later,  $5000; 
William  J.  Robinson,  $10,300;  and  the  Southwest  Mort- 
gage Company,  $30,000. 

It  will  be  illuminating  to  see  who  controlled  some  of 
these  concerns.  The  president,  the  vice-president,  and  the 
secretary  of  the  Turtle  Oil  Company  were  respectively: 2 
George  W.  Walter,  W.  L.  Norton,  and  V.  McFadden;  of 
the  Exchange  Drilling  Company,  WT.  J.  Robinson,  W.  C. 
Raymond,  and  V.  McFadden.  W.  J.  Robinson,  the  presi- 
dent of  this  company,  was  the  maker  of  the  personal  note 
for  $10,300  mentioned  above.  W.  C.  Raymond,  the  vice- 
president  of  this  company,  was  officially  connected  with  a 
number  of  other  Norton-McFadden  institutions  not  men- 
tioned here  whose  paper  wrecked  other  Oklahoma  banks. 

1  Report  on  the  Oklahoma  State  Guaranty  Fund,  Arthur  Young  &  Com- 
pany, Certified  Public  Accountants,  Kansas  City,  Missouri,  pp.  63-64. 

1  These  facts  are  taken  from  the  articles  of  incorporation  in  the  office 
of  the  .tecretary  of  state,  and  from  records  in  the  office  of  the  state  corpora- 
tion commission. 


50      THE  GUARANTY  OF  BANK  DEPOSITS 

The  Twenty-Five  Oil  Company  was  an  interesting  cor- 
poration. This  concern  had  three  officers,  three  directors, 
and  three  stockholders.  The  three  persons  in  each  case 
were  Homer  Needles,  George  W.  Walter,  and  Mattie  Ault. 
It  was  capitalized  for  $25,000,  each  of  the  above-enumer- 
ated persons  holding  one  share  of  stock,  par  value  $25. 
With  a  paid-in  capital  of  $75,  this  oil  company  had  bor- 
rowed $10,000  from  the  Columbia  Bank  and  Trust  Com- 
pany. The1  recurrence  of  the  names  of  W.  L.  Norton, 
V.  McFadden,  etc.,  should  be  noted.  This,  of  course,  is  not 
a  complete  list  of  the  oil  paper  which  the  portfolio  of  the 
Columbia  contained.  After  all,  the  sums  involved  in  these 
cases  were  not  large,  but  they  serve  as  an  indication  of  the 
type  of  men  who  were  getting  the  Columbia's  deposits. 
It  is  known  that  this  bank  accumulated  upwards  of  $650,- 
000  additional  paper  of  this  general  nature  in  the  two 
months  prior  to  its  collapse.  It  would  be  interesting  to  know 
the  companies  involved  and  the  men  who  directed  them. 

Among  the  uncollected  assets  were  five  personal  notes  of 
W.  L.  Norton  amounting  to  $211, 563.69. x  These  notes 
probably  represent  loans  from  his  bank  to  assist  him  in 
caring  for  his  oil  paper  when  it  was  thrown  out  of  the 
national  banks.  When  the  bank  failed  I.  M.  Putnam, 
another  celebrated  Oklahoma  plunger,  owed  the  bank 
$60,520. 95. 2  This  was  two  years  before  Putnam's  fall,  and 
being  at  this  time  near  the  meridian  of  his  power,  the 
bank  suffered  little.  We  shall  hear  of  Mr.  Putnam  again, 
but  his  name  is  mentioned  here  to  show  the  type  of  men  to 
whom  the  Columbia  was  loaning  large  sums  of  money. 

We  shall  now  turn  our  attention  to  the  payment  of  the 
depositors.  The  law  required  that  the  depositors  be  paid 
at  once.  The  situation  was  most  delicate.  About  $2,800,- 
000  was  owed  to  depositors.  When  the  Columbia  closed  it 

1  Report  on  the  Oklahoma  State  Guaranty  Fund,  Arthur  Young  &  Com- 
pany, Certified  Public  Accountants,  Kansas  City,  Missouri,  p.  52. 

2  Ibid.,  p.  53. 


THE  OKLAHOMA  SYSTEM  51 

had  about  $28,000  in  cash  and  $185,000  in  sight  exchange. 
The  guaranty  fund  amounted  to  about  $300,000,  $50,000 
of  which  was  deposited  in  the  Columbia  Bank  and  Trust 
Company.  Of  the  remaining  $250,000,  three  fourths  of  it 
was  deposited  in  other  banks.  Governor  Haskell,  in  the 
capacity  of  chairman  of  the  banking  board,  arrived  from 
Guthrie  about  eight  o'clock  of  the  evening  before  the  clos- 
ing of  the  bank.  A  hurried  session  of  the  banking  board  was 
held  at  the  Lee-Huckins  Hotel.  Other  members  of  the 
board  told  the  governor  that  it  was  out  of  the  question  to 
think  of  opening  the  bank  the  next  morning  to  pay  de- 
positors with  the  funds  on  hand.  Haskell  dramatically 
informed  them  that  the  bank  would  be  opened  the  next 
morning  at  the  usual  hour.  From  that  moment  he  was  in 
supreme  command.  Wherever  the  narrative  refers  to  an 
action  of  the  banking  board,  it  will  be  understood  that  the 
board  is  only  a  name  connoting  the  will  of  this  remarkable 
man  —  a  man  admired,  yet  distrusted  by  many  of  his 
friends,  feared  and  hated  by  his  enemies.  It  must  be  borne 
in  mind  that  Haskell  was  the  one  person  responsible  for  the 
law.  He  had  unsuccessfully  advocated  it  before  the  bank- 
ing committee  of  the  constitutional  convention;  when  the 
panic  of  1907  broke  he  earnestly  commended  it  to  the  first 
legislature,  and  even  went  so  far  as  to  outline  the  plan 
finally  adopted;  in  the  summer  of  1908  he  went  to  Denver 
and  was  a  potent  factor  in  getting  the  guaranty  plank  into 
the  Democratic  national  platform.  Now  his  pet  scheme 
was  subjected  to  its  first  baptism  of  fire,  and  Haskell 
realized  that  his  own  political  fortunes  and  probably  those 
of  his  party  depended  on  the  issue.  His  first  move  was  to 
make  arrangements  with  the  local  telephone  company  for 
an  open  wire  to  Kansas  City  and  St.  Louis  for  two  hours. 
There  he  got  in  touch  with  certain  parties  and  told  them 
that  he  must  have  money.  Before  morning  it  is  said  he 
raised  in  this  way  about  $450,000.' 

1  Sec  footnote  S  on  page  48. 


52      THE  GUARANTY  OF  BANK  DEPOSITS 

When,  on  the  morning  of  September  29,  1909,  the  bank 
commissioner  opened  the  doors  to  pay  depositors,  as  re- 
quired by  law,  he  had  probably  about  half  a  million  in 
ready  funds,  plus  the  assets  of  the  failed  bank,  of  which 
upwards  of  a  million  dollars  ultimately  proved  bad,  to 
meet  deposits  amounting  to  over  $2,800,000.  There  could 
be  but  one  result.  Great  discrimination  was  shown  hi  pay- 
ing depositors.  The  small  depositors  were  paid  first  and 
only  banks  and  other  large  depositors  that  could  show  an 
urgent  need  were  given  any  part  of  their  deposits.  It  will 
be  recalled  that  the  Columbia  had  accounts  with  one  hun- 
dred and  nineteen  country  banks  aggregating  $1,328,- 
383.79.  These  were  the  depositors  that  did  not  get  their 
money  at  once.  When  these  bankers  came  in  they  were 
allowed  to  go  through  the  portfolio  of  the  Columbia  and 
select  what  paper  they  wanted  to  offset  their  claims.  When 
one  would  get  recalcitrant  and  want  cash,  he  would  be 
taken  back  into  the  directors'  room  and  the  banking  board 
would  say  to  him:  "You  can't  get  your  money.  This 
guaranty  system  is  trembling  in  the  balance  and  you 
might  as  well  act  decently.  Go  home  and  carry  your  ac- 
count with  this  bank  (defunct)  as  an  asset  in  your  state- 
ment and,  if  necessary,  count  it  as  a  part  of  your  legal 
reserve."  * 

The  policy  of  the  administration  was  to  present  a  bold 
front  to  the  small  depositors  and  thus  allay  excitement. 
Advertisements  were  inserted  hi  the  local  papers  asking 
the  depositors  to  call  and  get  their  money.  Instead  of 
closing  at  three  o'clock  the  bank  was  kept  open  until  five  in 
the  afternoon  so  as  to  suit  the  convenience  of  the  laboring 
people.  Here  was  the  first  chance  to  test  the  much-heralded 
talismanic  power  of  bank  guaranty  to  stop  bank  runs. 
Again  the  testimony  of  the  Wisconsin  committee  is  our 
most  unbiased  evidence: 

1  Statement  as  given  in  conversations  with  several  state  bankers  who 
carried  balances  with  the  Columbia. 


THE  OKLAHOMA  SYSTEM  53 

The  closing  of  the  bank  caused  no  riffle  in  the  business  world 
of  Oklahoma  City,  the  public  was  not  excited,  there  was  no  run 
on  any  other  bank,  state  or  national.  Depositors  apparently  had 
confidence  that  they  would  get  their  money.  They  acted  in  an 
orderly  and  well-behaved  fashion.  They  drew  their  money  out 
of  the  defunct  bank  and  placed  it  in  other  banks.  As  a  matter  of 
fact,  at  the  close  of  business  on  the  day  after  the  failure,  the  books 
of  every  other  bank  in  the  city  showed  an  increase  in  deposits. 
While  the  lobby  of  the  bank  was  quite  well  filled  with  depositors 
there  was  no  excitement  or  disorder,  and  so  far  as  the  street  was 
concerned  there  was  nothing  to  raise  the  suspicion  on  the  part  of 
any  one  that  he  was  passing  by  a  bank  whose  doors  had  just  been 
closed.  No  business  interests  in  the  city  were  disturbed,  com- 
promised, or  embarrassed  in  any  manner. 

The  committee  came  in  contact  with  a  great  many  of  the  people 
who  had  money  on  deposit  in  the  bank;  some  of  whom  appeared 
before  the  committee,  and  all  gave  expression  to  the  sentiment 
that  they  were  in  no  particular  hurry  for  their  money,  that  they 
knew  it  was  safe,  and  that  they  would  call  for  it  after  the  rush 
was  over.1 

The  following  figures  of  Oklahoma  City  banks,  some- 
what condensed,  are  taken  from  "Sturm's  Oklahoma 
Magazine"  *  and  throw  light  on  the  effect  of  this  failure 
on  the  depositing  public: 

Six  national  banks  had  deposits  of  $7,935,971  on  September  29, 
1909.  and  $9,280,951  on  November  11.  Six  state  banks  had  de- 
posits of  $1,578,437  on  September  29,  and  $2,493,319  on  Novem- 
ber 11.  This  shows  that  the  national  banks  had  an  absolute 
increase  of  $1,354,930  or  17  per  cent,  while  that  for  the  state 
banks  was  $914.882,  or  over  58  per  cent.  However,  these  figures 
include  $370,000  on  deposit  with  the  Central  State  Bank  on 
November  11,  an  institution  organized  since  the  Columbia  fail- 
ure. In  this  time  only  about  $1,000,000  of  individual  deposits 
of  the  Columbia  had  been  paid,  yet  the  total  increase  of  bank 
deposits  of  the  city  was  $2,269,862. 

No  doubt  seasonal  changes  will  do  much  to  explain  this 
increase  in  deposits,  but  the  fact  remains  that  these  figures 

1  Report  of  Special  Committee  on  Banking,  Wisconsin  Legislature,  pp. 
11-12. 
1  December.  1909.  p.  31. 


54      THE  GUARANTY  OF  BANK  DEPOSITS 

show  that  the  failure  did  anything  but  cause  a  general  dis- 
trust of  banks.  It  is  also  worthy  of  note  that  while  the 
state  banks  relatively  gained  faster,  the  great  majority  of 
the  deposits  went  into  the  unguaranteed  national  banks. 

When  the  Columbia  failed  an  emergency  assessment  of 
three  fourths  of  one  per  cent  of  average  daily  deposits  for 
1908  was  levied  and  this  added  about  $248,000  to  the  guar- 
anty fund.  The  banking  board  also  sold  certain  securities 
to  Cobe  and  McKinnon  for  $300,000.  On  October  30, 
1909,  one  month  after  the  failure,  $411,000  of  deposits  re- 
mained unpaid.1  State  deposits  and  other  special  deposits 
were  met  by  the  sale  of  the  collateral  which  secured  them.2 
By  December  15,  1910,  all  deposits  had  been  paid  in  full 
except  $11,256.79,  which  represented  accounts  not  called 
for  or  deposits  against  which  a  counter-claim  was  held.3 

The  bank  commissioner  opened  the  bank  to  pay  deposi- 
tors before  attempting  to  ascertain  the  extent  of  the  failure. 
It  was  later  discovered  that  the  loan  and  discount  register, 
the  daily  statement  book,  the  cash  book,  and  other  impor- 
tant records  had  disappeared,  and  these  have  never  been 
recovered.  In  fact,  the  whole  liquidation  of  the  Columbia 
Bank  and  Trust  Company  was  so  hasty  and  careless  that 
when  a  report  was  being  prepared  in  1911  on  the  guaranty 
fund,  no  satisfactory  records  of  the  liquidation  could  be 
found,  and  the  examiners  were  compelled  to  subpoena 
witnesses  and  take  oral  testimony  as  to  the  transactions.4 
In  1912  the  state  examiner  and  inspector  made  a  careful 
report  on  the  liquidation  of  the  Columbia.  This  report 
showed  that  the  banking  board  entered  into  two  contracts 
with  Messrs.  Cobe  and  McKinnon,  the  wrecking  com- 
pany of  Chicago.  One  contract  showed  that  for  a  certain 
enumerated  list  of  securities  the  above  firm  was  to  pay 
to  the  banking  board  $225,000.  The  contract  called  for 

1  Statement  of  the  Bank  Commissioner,  October  30,  1909. 

2  Quarterly  Journal  of  Economics,  1909,  24 : 332. 

s  Second  Biennial  Report  of  the  Bank  Commissioner,  p.  vii. 

*  Commercial  and  Financial  Chronicle,  November  2,  1912,  p.  1172. 


THE  OKLAHOMA  SYSTEM  55 

$71,750  of  Bartlesville  Light  and  Water  bonds,  but  the 
records  show  that  $111,750  were  actually  delivered.  The 
$40,000  of  extra  bonds  turned  over  is  not  accounted  for. 
The  report  also  shows  that  $35,000  of  the  $225,000  was 
never  paid.  According  to  the  second  contract  the  same 
firm  was  to  pay  $75,000  for  a  certain  list  of  notes,  bonds, 
and  other  securities,  but  of  this  amount  $16,605.22  re- 
mains unpaid.  Messrs.  Cobe  and  McKinnon  claim  that 
they  have  counter-claims  which  offset  these  discrepancies. 
No  one  in  Oklahoma  seems  to  know  the  exact  status  of 
the  case,  and  since  there  is  no  disposition  to  unearth  any 
skeletons,  the  matter  will  probably  rest  there. 

The  closing  and  liquidation  of  the  Columbia  was  at- 
tended with  much  bitterness  between  the  national  banks 
and  the  state  administration.  From  the  beginning  the 
national  banks  felt  that  a  state  guaranty  law  worked  a 
gross  injustice  to  them.  They  believed  such  a  law  to  be 
thoroughly  unsound,  and  the  fear  that  it  would  ruin  their 
business  called  forth  doleful  jeremiads  regarding  the  evil 
days  that  must  of  necessity  come.  When  the  Columbia 
went  down,  they  raised  the  cry,  "We  told  you  so."  They 
charged  that  the  Columbia  was  an  "administration  "  hank, 
meaning  that  the  administration  was  in  collusion  with  the 
whole  sordid  procedure.  A  few  days  before  the  bank  was 
closed  a  certain  Oklahoma  banker  told  Norton  that  for 
$5000  he  would  "fix"  things  with  Bank  Commissioner 
Young  so  that  the  bank  would  not  be  closed.  The  banker 
got  the  $5000,  but  said  nothing  to  the  bank  commissioner. 
When  this  became  known  it  provoked  more  ugly  talk  and 
the  public  feeling  moved  the  banking  board  to  compel  the 
banker  to  return  the  money  to  the  assets  of  the  bank.  As 
the  story  of  the  Columbia  failure  became  better  known 
there  developed  a  quarrel  daily  renewed  between  Haskell 
and  certain  national  bankers.  The  governor  issued  a  daily 
statement  saying  that  the  law  was  a  complete  success  and 
abusing  the  national  bankers  for  attempting  to  discredit  it. 


56      THE  GUARANTY  OF  BANK  DEPOSITS 

Certain  national  bankers  increased  the  pressure  of  their 
ridicule  until  Haskell  became  so  irritated  that  he  sent  for 
the  worst  offenders  and  called  their  attention  to  the  fact 
that  there  was  a  state  law  against  discrediting  a  banking 
institution  by  circulating  false  statements  concerning  it. 
The  threat  had  some  effect,  but  the  good  governor  seems 
to  have  overlooked  the  fact  that  the  law  referred  only  to 
"false"  statements. 

Soon  after  the  bank  closed  Attorney-General  West  on 
his  own  initiative  began  a  grand-jury  investigation  for  the 
purpose  of  prosecuting  Norton  and  other  officials  of  the 
bank.  Haskell  forthwith  ordered  this  investigation  stopped. 
The  governor  was  handling  the  situation  and  he  demanded 
that  he  be  allowed  to  do  it  in  his  own  way.  His  excuse  for 
stopping  the  investigation  was  that  it  would  have  a  delete- 
rious effect  upon  the  liquidation  of  certain  assets  of  the 
defunct  bank.  The  governor  had  but  one  end  in  view  and 
that  was  to  make  this  incident  a  complete  triumph  for 
the  guaranty  law.  To  accomplish  his  purpose  he  was  not 
very  particular  as  to  the  means  employed.  He  knew  that  if 
Norton  was  sent  to  the  penitentiary  the  banking  board 
would  get  only  such  part  of  his  private  fortune  as  could  be 
legally  taken.  Haskell  chose  to  shield  Norton  from  prose- 
cution and  then  strip  him  for  the  benefit  of  the  depositors 
and  the  state  bankers.  In  the  course  of  the  liquidation 
Norton  turned  over  securities  having  a  nominal  value  of 
$1,053,600.  The  appraised  value  of  these  securities  was 
about  $565,000,*  but  they  were  in  large  part  stocks  of 
the  most  visionary  oil  and  development  enterprises  which 
were  already  in  the  last  stages  of  bankruptcy.2  What  was 

1  Report  of  the  State  Examiner  and  Inspector,  p.  217  D. 

2  These  securities  were  as  follows:  Numerous  promissory  notes,  par 
value,  $240,600.57.   Among  these  notes  were  those  of  twelve  oil  compa- 
nies, including  those  named  above  and  others  of  like  nature.   There  were 
also  numerous  individual  notes  of  which  Norton  was  either  the  maker  or 
the  endorser.    Stock  of  the  Renfrow  Oil  and  Gas  Company,  par  value, 
$379,000;  bonds  of  the  Bartlesville  Water  and  Light  Company,  par  value, 
$24,000;  real  estate  in  Oklahoma  City,  known  as  the  W.  L.  Norton  block, 


THE  OKLAHOMA  SYSTEM  57 

finally  realized  from  this  personal  wealth  of  Norton  is  not 
known. 

But  these  strong-arm  methods  of  the  governor  in  shield- 
ing criminals  from  prosecution  had  a  more  far-reaching 
effect.  Many  state  bankers  seemed  to  get  the  idea  that 
they  were  immune  from  prosecution.  We  must  remember 
that  more  than  fifty  banks  have  gone  down  since  the  wreck 
of  the  Columbia,  and  some  of  these  failures  surpass,  if 
possible,  the  bank-robbing  aspects  of  the  Columbia's 
history.  The  story  is  told  in  Oklahoma  that,  shortly  after 
this,  one  of  the  state  bank  examiners  told  a  banker  to  charge 
off  certain  paper  which  was  considered  worthless.  The 
story  goes  that  the  banker  told  the  examiner  to  descend  to 
the  promised  land.  Probably  this  incident  does  not  much 
exaggerate  the  lawless  attitude  of  certain  Oklahoma  bank- 
ers for  the  next  two  or  three  years.  This  Columbia  failure 
cost  the  other  banks  of  the  state  $582,283.79. 

It  would  prove  both  tedious  and  unprofitable  to  take  up 
in  detail  the  other  fifty-odd  failures  as  we  have  the  Colum- 
bia. However,  it  is  necessary  to  describe  some  of  the 
typical  failures  in  order  to  show  the  various  forces  working 
to  effect  the  failures  and  to  watch  the  guaranty  system  in 
operation  under  divers  conditions. 

The  First  State  Bank  of  Kiefer,  Oklahoma,  failed  De- 
cember 14,  1909,  and  was  taken  in  charge  by  A.  M.  Young, 
the  bank  commissioner.  This  bank  closed  because  of  the 
liquidation  of  the  Farmers'  National  Bank  of  Tulsa,  the 
Kiefer  bank  having  a  deposit  there  of  $21,000.  Forty-four 
thousand  dollars  was  drawn  from  the  guaranty  fund,  and 
with  what  was  realized  on  the  quick  assets  of  the  bank  the 
depositors  were  paid  in  full  in  eight  days.1 

$18,000;  Henson  Oil  Company  stock,  par  value.  $10.000;  Twenty-Five  Oil 
Company  stock,  par  value,  $50,000;  Military  Park  Company's  6rst 
mortgage  bonds,  $100,000;  Military  Park  Company's  note  secured  by 
mortgage.  $450,000.  See  Rf port  of  Arthur  Young  &  Company.  Certified 
Public  Accountants,  Kansas  City,  Missouri,  p.  49. 

1  Second  Biennial  Report  of  the  Bank  Commutioner,  p.  viii. 


58      THE  GUARANTY  OF  BANK  DEPOSITS 

On  December  31,  1909,  the  Bank  of  Ochelata,  having 
deposits  of  over  $50,000,  failed  and  was  taken  in  charge  by 
the  bank  commissioner.  This  bank  was  liquidated  through 
a  new  institution  known  as  the  Oklahoma  State  Bank.  The 
commissioner  agreed  to  protect  the  Oklahoma  State  Bank 
against  loss  in  assuming  the  obligations  of  the  failed  bank. 
It  was  with  this  bank  that  the  state  banking  board  inau- 
gurated its  policy  of  liquidating  a  failed  bank  either  through 
a  new  institution  or  another  bank  located  in  the  same  town. 
This  method  the  commissioner  claimed  was  much  more 
economical,  as  the  banking  board  need  handle  only  such 
paper  as  the  new  institution  was  unable  to  collect  or  renew 
satisfactorily.  The  commissioner  pointed  out  that  this 
method  not  only  required  less  funds,  but  also  caused  less 
disturbance  in  the  community.1  On  January  25,  1910,  the 
Oklahoma  State  Bank  reported  that  they  were  short  to 
the  sum. of  $18,968.48  in  collecting  on  the  assets  of  the 
Ochelata  Bank,  and  the  state  banking  board  then  made 
good  this  amount  from  the  guaranty  fund.2 

The  Oklahoma  State  Bank  of  Durant  failed  April  28, 
1910,  and  the  state  banking  board  deposited  $25,000  with 
the  Oklahoma  State  Bank,  through  which  the  failed  bank 
liquidated,  to  protect  it  from  loss.3  On  March  3,  1911,  the 
Bank  of  Geary  closed  and  was  liquidated  through  the 
American  State  Bank  of  Geary.  This  failure  cost  the 
guaranty  fund  $23,024.20.4  The  Citizens'  Bank  of  Moun- 
tain Park  failed  April  10,  1911,  and  was  liquidated  through 
the  Planters'  State  Bank  of  Mountain  Park.  The  banking 
board  took  over  $25,690  in  notes  representing  fraudulent 
transactions  of  the  bank  officials  and  had  the  officials 
arrested.5  The  Farmers'  and  Merchants'  Bank  of  Sapulpa 
failed  September  10,  1912,  and  its  liquidation  cost  the 

1  Second  Biennial  Report  of  the  Bank  Commissioner,  p.  xii. 
*  Ibid.,  p.  ix.  3  Ibid.,  p.  x. 

4  Third  Biennial  Report  of  the  Bank  Commissioner,  p.  xii. 

5  Ibid.,  p.  xiv. 


THE  OKLAHOMA  SYSTEM  59 

guaranty  fund  $1 05,382.95. l  A  member  of  the  state  bank- 
ing board  reported  this  failure  as  being  "the  worst  mass  of 
filth  he  had  seen  in  Oklahoma  banking."  2  Two  of  the 
officers  were  placed  in  jail  for  failure  to  produce  the  books.3 
The  failure  of  the  Creek  Bank  and  Trust  Company  of 
Sapulpa  "was  a  crooked  failure  and  one  of  the  officers  was 
sentenced  to  the  penitentiary."  4  This  failure  cost  the 
fund  $46,418.26.5  The  liquidation  of  the  Bank  of  Snyder 
required  $18,732.27  to  pay  depositors,  and  the  failure  of  the 
Security  State  Bank  of  Sulphur  cost  the  fund  $26,556.71. 6 

The  Alva  Security  Bank  of  Alva  cost  the  fund  $86,938.33. 
This  failure  was  caused  by  their  "attempting  to  finance 
railroad  deals,  town-sites,  creameries,  etc.;  their  note-case 
was  several  thousand  dollars  short."  7  The  cashier  was 
arrested.  The  failure  of  the  Bank  of  Commerce  of  Alva 
required  $22,955.51  from  the  guaranty  fund  to  pay  de- 
positors. This  failure  was  due  to  an  excessive  amount  of 
large  loans.8  The  Anadarko  State  Bank  of  Anadarko  cost 
the  fund  $63,213.48.  "The  failure  of  this  bank  was  brought 
about  by  certain  stockholders  of  the  institution  using  an 
excessive  amount  of  the  funds  of  the  bank  to  promote 
their  personal  interests." 9  The  failure  of  the  Bank  of  Elgin, 
of  Elgin,  Oklahoma,  represented  a  loss  of  $11,351.46,  the 
failure  being  caused  by  dishonest  management.10  The  failure 
of  the  Bank  of  Garvin,  caused  by  financing  speculative 
propositions  and  bad  loans,  cost  the  fund  $58, 7 18. 23. M 

The  failure  of  the  Garfield  Exchange  Bank  of  Enid  is  a 
good  example  of  much  that  took  place  in  Oklahoma.  Two 
things  wrecked  this  bank  —  a  president  who  was  by  nature 
a  promoter  rather  than  a  banker,  and  the  real-estate  boom 

Records  in  the  office  of  the  Bank  Commissioner,  March  1,  19iO. 

Quarterly  Journal  of  Economic*.  1913.  28  :  75. 

Ibid..  *  Ibid.. 

Records  in  the  office  of  the  Rank  Commissioner.  March  1,  1920. 

Third  Biennial  Report  of  the  Bank  Commissioner,  p.  xviii. 
1  Fourth  Biennial  Report  of  the  Bank  Commissioner,  p.  304. 
•  Ibid,,  p.  305.  •  Ibid..  l°  Ibid.,  p.  306.  >l  Ibid.,  p.  308. 


60      THE  GUARANTY  OF  BANK  DEPOSITS 

which  Enid  in  company  with  many  other  Oklahoma  towns 
was  enjoying  at  this  time.  Ferguson,  the  president  of  this 
bank,  had  the  reputation  of  being  a  good  business  man, 
and  not  long  before  had  been  president  of  the  Oklahoma 
Bankers'  Association.  But  notwithstanding  this  ieputa- 
tion  he  was  essentially  a  plunger.  He  loaned  heavily  to  per- 
sons who  were  supposed  to  be  good,  but  took  inadequate 
security.  When  the  boom  collapsed  and  the  sequent  de- 
pression overwhelmed  his  customers,  he  was  clever  enough 
to  unload  the  mess  on  to  artless  purchasers  before  the  crash 
came.  In  fact,  there  seems  to  be  pretty  good  evidence  that 
Ferguson  used  the  bank  to  lubricate  his  own  ventures  with 
always  the  same  result,  namely,  that  when  the  venture 
turned  out  well  it  belonged  to  Ferguson;  when  it  went 
wrong  it  belonged  to  his  bank. 

The  rehearsal  of  one  of  his  typical  transactions  will  be 
illuminating:  Ferguson  purchased  one  hundred  and  sixty 
acres  of  land  about  two  miles  from  Enid  and  was  successful 
in  getting  the  fair  grounds  and  stock  pavilion  located  on  it. 
This  stock  pavilion  was  a  magnificent  building  with  accom- 
panying grounds  where  cattle  and  other  live-stock  would 
be  bought  and  sold.  It  cost  $50,000  and  had  the  facilities 
for  making  Enid  one  of  the  largest  stock-show  centers  of 
the  country.  The  promoters  sold  bonds  to  the  amount  of 
about  $32,000,  and  Ferguson's  bank  loaned  the  other 
$18,000.  The  whole  enterprise  was  ridiculously  out  of 
proportion  to  the  ability  of  Enid's  environs  to  support  such 
an  institution,  with  the  result  that  it  almost  at  once  went 
into  bankruptcy.  The  building  was  finally  torn  down  and 
the  salvage  sold.  Ferguson  was  sagacious  enough  to  see  the 
gathering  storm  and  sold  his  bank  to  one  Butler  for  a  dollar 
and  fifty  cents  on  the  dollar.  Butler  had  been  a  country 
banker  with  city  ambitions,  but  died  soon  after  gaining 
control  of  the  bank,  with  a  broken  heart,  it  is  said,  because 
of  his  inability  to  return  the  bank  to  solvency.  The  bank 
was  in  the  hands  of  a  clergyman  by  the  name  of  Homey  at 


THE  OKLAHOMA  SYSTEM  61 ' 

the  time  it  was  taken  over  by  the  bank  commissioner.  The 
bank  commissioner  induced  a  new  management  to  take 
over  the  bank,  agreeing  to  protect  them  from  loss.  In 
January,  1915,  the  District  Court  of  Garfield  County  or- 
dered the  bank  commissioner  to  sell  certain  of  the  assets  of 
the  bank  that  were  in  the  custody  of  the  court.  In  con- 
formity with  this  order  notes  of  the  net  value  of  $90,709.71 
and  overdrafts  of  the  Garfield  Bank  to  the  amount  of 
$1879.50  were  sold  at  private  sale  for  $13,319.95. l  It 
required  $105,570.29  from  the  guaranty  fund  to  make  good 
the  deposits  of  this  bank. 

Another  failure  which  will  repay  examination  is  that  of 
the  Alamo  State  Bank  of  Muskogee.  This  failure  cost  the 
guaranty  fund  $160,910.84.  The  trouble  started  with  the 
Oklahoma  Trust  Company  of  Muskogee.  On  January  3, 
1910,  the  Alamo  State  Bank  took  over  certain  assets  of  the 
Oklahoma  Trust  Company,  and  the  general  nature  of  this 
paper  is  so  similar  to  much  of  the  paper  held  by  the  Colum- 
bia Bank  and  Trust  Company  that  the  following  samples 
are  given  to  show  what  a  small  clique  of  conscienceless 
speculators  was  doing  to  Oklahoma  banks.  It  should  be 
remembered  that  this  trouble  started  with  the  Oklahoma 
Trust  Company,  and  this  institution  should  further  be  re- 
membered because  of  its  connection  with  the  deal  whereby 
another  set  of  disreputable  manipulators  gained  control  of 
and  later  wrecked  the  Night  and  Day  Bank  of  Oklahoma 
City.  This  Oklahoma  City  episode  will  receive  attention  in 
another  place. 

The  following  are  samples  of  this  paper:1  Exchange 
Investment  Company,  W.  L.  Norton  security,  $57,750; 
Exchange  Oil  Company,  W.  L.  Norton  security,  $26,150; 
Kansas  Reduction  Company,  $11,945;  Kentucky  and 
Ohio  Oil  and  Refining  Company,  $12,778;  Landon  Invest- 

1  District  Court  of  Garfield  County.  State  of  Oklahoma,  1904,  In  re 
J.  D.  Lankford. 

1  Rrpnri  on  thf  Oklahoma  State  Guaranty  Fund,  Arthur  Young  &  Com* 
pany,  Certified  Public  Accountants,  Kansas  City,  Missouri,  pp.  94-95. 


62      THE  GUARANTY  OF  BANK  DEPOSITS 

ment  Company,  W.  L.  Norton  security,  $23,757.68; 
Madison  Oil  Company,  W.  L.  Norton  security,  $5432; 
James  A.  Menefee  and  W.  L.  Norton,  $9661.56;  W.  L. 
Norton,  $87,698;  I.  M.  Putnam,  2200  shares  of  Putnam 
City  stock  security,  $7125;  Mutual  Investment  Company, 
W.  L.  Norton  security,  $26,574.60;  John  E.  Tanner, 
Renfrew  Oil  stock  security,  $10,600;  W.  D.  Applebee, 
Renfrew  Oil  stock  security,  $13,184;  W.  D.  Applebee, 
Southwest  Mortgage  Company  stock  security,  $5238; 
L.  A.  Moran,  South  west  Mortgage  Company  stock  security, 
$5238;  C.  H.  Brown,  Southwest  Mortgage  Company  stock 
security,  $5240;  C.  M.  Bradway,  Southwest  Mortgage 
Company  stock  security,  $5240;  Genesee  Chemical  Com- 
pany, $14,720;  and  J.  H.  Bradley,  Wellsville  Oil  Company 
stock  security,  $4400. 

Attention  has  already  been  called l  to  the  names  of  W.  L. 
Norton,  V.  McFadden,  W.  C.  Raymond,  and  others  as  the 
directors  of  companies  that  looted  the  Columbia  Bank  and 
Trust  Company.  Many  of  the  same  names  appear  as  the 
officers  of  companies  mentioned  above.2  W.  L.  Norton, 
Frank  Foster,  V.  McFadden,  and  W.  C.  Raymond  were  the 
officers  of  the  Exchange  Oil  Company;  Frank  Foster,  W.  C. 
Raymond,  and  L.  A.  Rowland  were  the  three  directors  of 
the  Landon  Investment  Company;  and  L.  A.  Rowland 
and  James  A.  Veasey  were  directors  of  the  Southwest 
Mortgage  Company.  The  Exchange  Investment  Company 
is  an  interesting  specimen.  There  is  no  record  of  this  com- 
pany either  in  the  office  of  the  secretary  of  state  or  in  the 
office  of  the  state  corporation  commission;  neither  does 
Bradstreet's  representative  in  Oklahoma  City  have  any 
record  of  such  a  concern;  yet  this  company  on  the  security 
of  W.  L.  Norton  secured  $57,750  from  the  bank  in  question. 
Most  of  these  coadjutors  of  Norton  were  Bartlesville  men, 

1  See  pages  49-50. 

2  Data  procured  from  the  articles  of  incorporation  in  the  office  of  the 
secretary  of  state,  and  from  records  in  the  office  of  the  state  corporation 
commission. 


THE  OKLAHOMA  SYSTEM  63 

but  their  activities  were  not  confined  to  that  locality.  L.  A. 
Rowland  and  the  other  organizers  of  the  Southwest  Mort- 
gage Company  were  from  Bartlesville,  yet  this  company's 
principal  place  of  business  was  Oklahoma  City.  This 
company  was  capitalized  for  a  million  dollars,  but  there  is 
neither  record  of  any  capital  paid  hi  nor  list  of  stockholders. 
The  best  informed  real-estate  men  in  Oklahoma  City  can- 
not recall  such  a  company,  yet  the  stock  of  this  corporation 
was  widely  used  as  security  for  large  loans  obtained  from 
many  banks.  No  record  can  be  found  of  most  of  the  other 
concerns,  although  the  name  of  Norton,  invariably  appear- 
ing as  security  for  the  loan,  gives  an  indication,  without 
doubt,  of  their  general  nature.  Most  of  these  companies 
were  organized  in  the  boom  period  of  1907  to  1911,  and 
almost  without  exception  they  were  extinct  by  1912.  It  is 
believed  that  these  details  will  help  to  give  a  more  definite 
conception  of  how  this  coterie  of  speculators  looted  banks 
and  the  guaranty  fund. 

As  before  stated  the  Alamo  State  Bank  took  over  this 
worthless  paper  from  the  Oklahoma  Trust  Company  on 
January  3,  1910.  The  Alamo  Bank  struggled  under  this 
load  for  nearly  eight  months  when,  on  August  25,  it 
was  taken  over  by  the  bank  commissioner.  To  liquidate 
this  bank  the  Union  State  Bank  of  Muskogee  was  organ- 
ized, the  banking  board  agreeing  to  protect  it  against  loss. 
The  Union  State  Bank  in  turn  began  to  accumulate  ob- 
jectionable paper  and  on  September  15,  1913,  the  bank 
commissioner  was  compelled  to  take  over  this  bank.  The 
loss  to  the  guaranty  fund,  however,  was  only  $7393.41. 

With  the  exception  of  the  Columbia  Bank  and  Trust 
Company  the  foregoing  are  some  of  the  representative  bank 
failures  that  have  occurred  outside  of  Oklahoma  City. 
With  a  few  exceptions  they  were  comparatively  small 
banks.  The  figures  for  these  failures  have,  for  the  most 
part,  t>een  taken  from  late  Reports  of  the  bank  commis- 
sioner, but  in  some  cases  the  bank  commissioner  is  still 


64      THE  GUARANTY  OF  BANK  DEPOSITS 

liquidating  assets,  so  from  time  to  time  successive  reports 
will  show  some  reductions. 

But  by  far  the  greatest  loss  has  been  sustained  in  Okla- 
homa City.  In  this  town  alone  over  one  and  a  half  million 
dollars  has  been  paid  from  the  guaranty  fund.  This  amount 
has  since  been  materially  reduced,  and  on  March  1,  1920, 
the  net  loss  was  as  follows : *  The  Columbia  Bank  and  Trust 
Company,  $582,283.79;  the  Night  and  Day  Bank,  $365,- 
228.58;  the  First  Stat^Bank,  $148,260.96;  the  Planters' 
and  Mechanics'  Bank,^Bfc,625.91 ;  the  Oklahoma  State 
Bank,  $61,742.72;  and  the  First  State  Bank  of  Capitol 
Hill,  $36,003.82;  making  a  total  of  $1,299,145.78.  This 
was  more  than  one  hah*  of  the  total  loss  of  the  state.  These 
great  Oklahoma  City  losses  have  shown  the  danger  of  a 
twofold  concentration  of  risk;  namely,  the  concentration 
of  risk  in  a  certain  bank  and  the  concentration  of  risk  in  a 
certain  community.  When  the  Columbia  Bank  and  Trust 
Company  failed  it  held  about  six  per  cent  of  the  aggregate 
deposits  of  the  state  banks.  Such  a  concentration  of  risk 
raises  serious  actuarial  problems.  The  fact  that  over  half 
the  losses  were  sustained  in  one  city  of  the  state  shows  the 
possibilities  of  injustice  in  the  distribution  of  the  burdens 
and  the  benefits  of  the  law  as  between  communities. 

We  have  already  delineated  the  part  played  by  the  Co- 
lumbia Bank  and  Trust  Company  in  the  Oklahoma  City 
failures.  But  the  Columbia  wreck  was  not  the  only  Okla- 
homa City  failure  that  smelled  to  heaven.  This  city  has 
some  other  malodorous  banking  history  which  should  not 
be  permitted  to  perish.  This  history  centers  in  the  per- 
sonalities of  I.  M.  Putnam  and  his  confederates  in  their 
attempt  to  promote  city  additions  and  town-sites.  The 
banks  in  question  were,  for  the  most  part,  the  Night  and 
Day  Bank  and  the  Planters'  and  Mechanics'  Bank  —  two 
banks  whose  combined  loss  cost  the  guaranty  fund  upwards 
of  a  half-million  dollars. 

1  Records  in  the  Bank  Commissioner's  Office. 


THE  OKLAHOMA  SYSTEM  65 

First  a  word  regarding  Mr.  Putnam.  Where  he  came 
from  no  one  seems  to  know  exactly.  He  was  reported  to  be 
worth  two  million  dollars  and  apparently  was  drawn  to 
Oklahoma  by  the  pioneer's  passion  for  building  new  insti- 
tutions. But  he  was  no  Rufus  Wallingford  —  on  the  con- 
trary, he  was  a  man  mild  and  unassuming  in  personal  man- 
ner, and  rather  unsystematic  in  his  personal  habits  and 
the  conduct  of  his  office.  He  was  not  out  to  swindle  any 
one.  The  consensus  of  opinion  in  Oklahoma  City  is  that, 
in  the  main,  he  was  an  honest  man  —  but  a  man  intox- 
icated by  the  sight  of  new  cities  rising  before  him  in  his 
dreams. 

Before  Mr.  Putnam  came  to  Oklahoma  City  the  Okla- 
homa Railway  Company  began  to  boom  a  small  town  nine 
miles  northwest  of  the  city.  They  bought  the  town-site  as 
cheap  agricultural  land  and  hoped  by  building  the  car  line 
out  to  it  to  sell  it  off  at  a  handsome  profit  as  city  lots.  Then 
Putnam  came.  The  project  appealed  to  him  and  he  bought 
out  the  Oklahoma  Railway  Company's  interest  in  the  place 
and  named  it  Putnam  City.  He  then  secured  control  of 
other  land  in  the  same  neighborhood,  making  in  all  about 
eight  thousand  acres.  Putnam  now  conceived  the  idea  of 
getting  the  proposed  new  state  capitol  building  located  at 
Putnam  City.  He  made  the  state  the  proposition  that  if  it 
would  locate  the  state  capitol  at  Putnam  City,  he  would 
turn  over  to  the  state  this  eight  thousand  acres.  The  state 
was  to  get  the  first  million  dollars  when  the  lots  were  sold, 
after  which  he  was  to  get  the  rest.  A  railway  with  elevated 
crossings  was  to  run  from  Oklahoma  City  to  Putnam  City 
—  making  the  nine  miles  in  about  eight  minutes.  Just  why 
Governor  Haskell  became  such  an  enthusiastic  convert  to 
the  project  is  not  known,  but  at  any  rate  he  lent  his  influ- 
ence to  the  movement  to  locate  the  capitol  at  Putnam  City. 
To  Putnam  the  proposition  had  all  the  allurements  of  a 
potential  fortune  and  he  launched  out  yet  farther. 

Putnam  now  gave  his  attention  to  the  promotion  of 


66      THE  GUARANTY  OF  BANK  DEPOSITS 

development  companies  of  sundry  kinds.  In  May,  1912,  he 
testified  in  the  United  States  District  Court  that  his  in- 
terests in  various  companies  in  1910  were  as  follows:  * 
College  Park  Land  Company,  95  to  99  per  cent;  College 
Park  Development  Company,  one  sixth  interest;  Military 
Park  Development  Company,  $240,000;  Putnam  City 
Company,  $1,000,000,  75  to  80  per  cent;  Putnam  Com- 
pany, practically  all;  Lakeside  Development  Company, 
75  to  95  per  cent;  Ellis  Place  Development  Company, 
$200,000,  75  per  cent. 

Putnam  testified  that  in  1910  the  companies  which  he  con- 
trolled owned  more  than  eight  thousand  acres  of  land  in  the  im- 
mediate vicinity  of  Oklahoma  City.  He  testified  that  the  land 
was  worth  at  that  time  from  $250  to  $2400  an  acre,  averaging 
probably  $1000  an  acre  or  more.  The  highest  valuation  was 
placed  on  the  133  acres  comprising  the  town-site  of  Putnam  City, 
which  he  said  was  worth  at  that  time  $2400  an  acre.  The  lowest 
was  on  land  lying  two  miles  north  and  west  of  Putnam  City, 
which  was  listed  at  from  $250  to  $400  an  acre.2 

These  outrageous  values  placed  upon  barren  open-country 
land  nine  miles  from  Oklahoma  City  were  accepted  as  safe 
by  the  parties  from  whom  Putnam  obtained  his  money. 
These  wild  estimates  were  the  product  of  the  febrile  mind  of 
the  promoter  and  any  foundation  they  might  have  was  con- 
tingent upon  the  location  of  the  capitol  building  at  Putnam 
City. 

Putnam  secured  control  of  these  various  development 
companies  in  two  ways.  In  some  cases  he  gave  his  unse- 
cured notes  to  the  bank  in  return  for  the  desired  funds. 
Sometimes  his  notes  were  secured  by  stock  of  the  above- 
named  companies  capitalized  at  the  values  already  given. 
Another  means  of  securing  funds  was  to  deed  Putnam  City 
property  to  his  employees  and  others  in  return  for  their 
notes  and  then  sell  the  notes  to  two  or  three  Oklahoma 
City  banks. 

1  The  Oklahoma  City  Times,  May  28,  1912,  p.  2.  2  Ibid.. 


THE  OKLAHOMA  SYSTEM  67 

R.  S.  McLean,  formerly  Putnam's  private  secretary,  on  the  wit- 
ness stand  identified  the  names  attached  to  a  long  list  of  notes 
which  formed  a  part  of  the  assets  of  the  Night  and  Day  Bank  as 
those  of  Putnam's  employees,  his  own  being  among  the  number. 
The  list  included  salesmen,  bookkeepers,  stenographers,  and  even 
the  telephone  operator  in  Putnam's  office.1 

Most  of  this  "Putnam  paper"  was  held  by  the  Night  and 
Day  Bank  and  the  Planters'  and  Mechanics'  Bank.  Its 
value,  as  we  have  said,  was  contingent  upon  the  location  of 
the  new  capitol  building  at  Putnam  City.  When  the  legisla- 
ture met  in  1910  Governor  Haskell  used  all  of  his  influence 
to  get  it  to  accept  Putnam's  proposition.  The  legislature 
refused.  In  1911  a  new  governor  and  a  new  legislature  lo- 
cated the  capitol  on  the  northeast  side  of  Oklahoma  City, 
about  nine  miles  from  Putnam  City,  and  Putnam's  project 
collapsed  like  a  house  of  cards.  Most  of  the  eight  thousand 
acres  of  land,  which  Putnam  valued  at  an  average  of  $1000 
or  more  an  acre  in  1910,  was  now  valuable  only  as  agricul- 
tural land,  and  since  it  is  poor  land  its  value  was  probably 
about  $75  an  acre. 

The  Night  and  Day  Bank  of  Oklahoma  City  was  the 
principal  victim  of  this  Putnam  City  episode.  Abner  Davis, 
the  owner  of  the  Oklahoma  City  baseball  franchise  in  the 
Texas  league,  was  the  president  of  this  institution.  But 
Davis  was  not  the  owner  of  the  bank,  for  Davis  had  no 
money  of  his  own.  I.  M.  Putnam  wanted  an  institution 
through  which  to  finance  his  projects,  and  Abner  Davis,  as 
president  of  this  bank,  was  only  a  dummy  set  up  by  Put- 
nam. Davis,  as  already  stated,  had  no  money  of  his  own, 
but  that  is  not  definitive  proof  that  he  could  not  buy  a 
bank.  As  a  financial  oj>erator  Davis  was  a  rare  genius  and 
the  methods  employed  by  him  and  Putnam  in  purchasing 
this  institution  from  its  former  owners  are  interesting  in  the 
extreme.'  The  parties  to  this  deal  were  four  in  number  — 

1  The  Oklahoma  Cily  Timt».  May  «*,  1912,  p.  1. 

1  The  information  for  this  paragraph  was  procured  from  a  man  who 
at  the  time  was  in  a  position  to  know  every  phase  of  the  transaction. 


68      THE  GUARANTY  OF  BANK  DEPOSITS 

Putnam,  Davis,  the  First  State  Bank  of  Oklahoma  City, 
and  the  Oklahoma  Trust  Company  of  Muskogee.  Putnam 
put  a  batch  of  his  Putnam  City  paper  into  the  First  State 
Bank  of  Oklahoma  City,  not  receiving  credit,  however, 
until  this  bank  had  shifted  the  paper  to  the  Oklahoma 
Trust  Company  of  Muskogee.   Now  that  the  First  State 
Bank  had  its  credit  with  the  Muskogee  institution,  it  cred- 
ited Putnam  with  a  deposit  of  about  $50,000,  the  amount  of 
the  deal.  Putnam  at  once  transferred  this  deposit  to  Abner 
Davis's  credit.  Davis  then  checked  against  this  deposit  to 
pay  for  the  stock  of  the  Night  and  Day  Bank.  Davis  now 
owned  a  bank,  and  he  immediately  transferred  (presum- 
ably this  was  a  part  of  the  agreement)  enough  of  the  funds 
of  his  newly  acquired  bank  to  the  Oklahoma  Trust  Com- 
pany to  protect  them  against  the  Putnam  paper  they  had 
taken  from  the  First  State  Bank  of  Oklahoma  City.  The 
Oklahoma  Trust  Company,  having  received  its  money, 
permitted  the  First  State  Bank  to  withdraw  its  deposit. 
Everybody  now  had  his  money  and  Davis  had  purchased 
a  bank  with  its  own  deposits.   It  is  of  interest  in  this  con- 
nection to  call  attention  to  the  fact  that  this  First  State 
Bank  of  Oklahoma  City  later  became  insolvent  and  cost  the 
guaranty  fund  $148,260.96,  while  the  Oklahoma  Trust 
Company  will  be  recognized  as  the  institution  that  foisted 
on  to  the  Alamo  State  Bank  of  Muskogee  the  worthless  oil 
and  investment  paper  of  W.  L.  Norton  and  his  coadjutors. 
Such  were  the  parties  to  this  disreputable  manipulation. 
Under  the  direction  of  the  new  management  an  extensive 
advertising  campaign  greatly  augmented  the  deposits  of 
the  Night  and  Day  Bank.   What  loanable  deposits  were 
left  after  paying  for  the  bank  were  used  principally  for 
lubricating  the  deals  of  Putnam  and  his  associates.   The 
fact  that  this  bank  had  deposits  of  $550,000  when  it  closed, 
yet  only  $16,012.67  was  realized  from  the  assets,  serves 
as  an  indication  of  the  magnitude  of  this  bank  robbery. 
Among  the  uncollectible   assets  of  this  bank  there  yet 


THE  OKLAHOMA  SYSTEM  69 

remain  some  sixty  notes,  aggregating  over  $112,000,  signed 
either  by  Putnam  or  some  of  his  employees. l  Besides  this 
sum  there  is  a  considerable  amount  of  other  paper  drawn 
in  the  name  of  the  before-mentioned  Putnam  development 
companies.  "M.  R.  Garnett,  a  former  state  bank  exam- 
iner and  deputy  bank  commissioner  at  the  time  of  the 
Davis  trial,  testified  .that  in  1910  the  bank  commissioner 
had  ordered  the  bank  to  charge  off  a  long  list  of  notes 
which  were  not  regarded  as  satisfactory,  but  a  large  num- 
ber of  them  were  still  in  the  bank  when  it  was  taken 
over  by  the  banking  board."  2  Oklahoma  sowed  the  wind 
when  Governor  Haskell  refused  to  prosecute  the  officials 
of  the  Columbia  Bank.  Now  she  was  reaping  the  whirl- 
wind. 

In  the  wreckage  of  this  bank  there  yet  remain  a  number 
of  notes  amounting  to  $70,000  drawn  by  Margaret  Mc- 
Kinley.  In  order  to  understand  what  these  notes  stood 
for  a  few  words  must  be  said  concerning  this  remarkable 
personage.  As  is  the  case  with  many  other  people  in  Okla- 
homa, where  Margaret  McKinley  came  from  is  not  just 
clear,  but  at  any  rate  she  was  a  good  accountant.  After 
reaching  Oklahoma  City  she  held  various  clerical  positions. 
Then  she  was  hired  to  audit  the  books  of  Oklahoma 
County.  From  this  position  she  went  to  better  ones, 
though  still  working  on  a  very  modest  salary.  With  a  little 
of  her  savings  she  invested  in  Oklahoma  City  real  estate. 
As  these  ventures  proved  fortunate  she  began  to  speculate 
a  little,  although  still  continuing  her  accustomed  work. 
Fortune  continued  to  smile  on  her,  and  after  amassing  a 
modest  competence  she  quit  work  and  gave  herself  over  to 
the  speculative  fever.  She  now  cast  aside  all  restraints  and 
her  fortune  mounted  upward,  until  she  became  involved  in 
the  Putnam  City  orgy  and  with  its  collapse  her  career 
ended. 

1  Records  in  the  Rank  Commissioner's  Office. 
1  The  Oklahoma  City  Times,  May  23,  1912,  p.  1. 


70      THE  GUARANTY  OF  BANK  DEPOSITS 

Under  its  new  management  this  Night  and  Day  Bank 
was  dishonest  in  its  very  inception.  Its  deposits,  funds 
held  in  trust  by  the  bank  officials,  were  used  to  further  the 
most  visionary  and  questionable  projects.  The  other  state 
bankers  paid  the  bill. 

After  the  closing  of  the  Night  and  Day  Bank  Abner 
Davis,  its  president,  spent  four  years  in  a  legal  fight  to 
escape  the  United  States  penitentiary.  He  first  faced  two 
trials  in  the  State  District  Court  on  charges  growing  out  of 
the  bank's  failure.  Here  he  was  acquitted.1  The  United 
States  Government  then  indicted  him  on  five  counts  and 
on  June  3,  1912,  the  United  States  District  Court  jury 
brought  in  a  verdict  of  guilty  on  one  count.  This  count  was 
that  Davis  had  sent  a  statement  of  the  bank's  condition 
through  the  mails  when  he  knew  that  it  was  false.2  United 
States  District  Judge  John  H.  Cotteral  then  granted 
Davis  a  new  trial  because  it  was  shown  that  a  person  had 
told  one  of  the  members  of  the  jury  that  he  would  not  be- 
lieve Davis  on  oath.3  Before  a  new  trial  occurred  he  was 
convicted  in  the  United  States  District  Court  at  Memphis, 
Tennessee,  with  five  others,  on  three  counts,  one  of  con- 
spiracy and  the  other  two  for  the  use  of  the  United  States 
mails  to  defraud.  The  case  was  appealed  to  the  United 
States  Circuit  Court  of  Appeals,  and  on  April  4, 1916,  this 
court  overruled  the  lower  court  on  all  three  points.  The 
court  gave  its  reasons  in  the  following  words : 

The  Memphis  bank  went  into  the  hands  of  a  receiver  August  9, 
1911.  Among  its  assets,  and  constituting  more  than  half  of  its 
ostensible  loans  and  discounts,  were  notes  of,  or  endorsed  by, 
I.  M.  Putnam,  of  Oklahoma  City,  amounting  to  about  $50,000. 
Thirty-one  thousand  dollars  of  these  notes  had  been  discounted 
at  the  Memphis  bank  about  March,  1911,  and  $16,000  in  Decem- 
ber, 1910,  by  respondent  Davis,  acting  either  for  himself  or  for 
the  Oklahoma  Night  and  Day  Bank,  of  which  he  was,  until  Janu- 
ary, 1911,  president  and  manager.  This  Putnam  paper,  at  the 

1  Bank  Deposit  Guarantee  Journal,  February,  1912,  p.  14. 

2  Ibid.,  July,  1912,  p.  25.  *  Ibid.,  July,  1912,  p.  11. 


THE  OKLAHOMA  SYSTEM  71 

time  of  the  trial  of  this  case,  was  regarded  as  nearly  or  quite 
worthless.  .  .  .  Davis  was  neither  stockholder  nor  director  in  the 
Memphis  bank;  he  had  nothing  to  do  with  its  management;  and 
he  touched  its  affairs  from  its  birth  to  its  death  at  only  two  or 
three  points.  The  chief  one  is  in  relation  to  the  Putnam  paper. 
He  and  Hendrey  shifted  $50,000  of  this  paper  from  his  shoulders 
or  those  of  his  bank  to  the  Memphis  bank.  There  was,  doubtless, 
a  personal  profit  in  this  paper  for  Davis,  and,  perhaps,  as  to  a 
part  or  all  of  it,  for  Hendrey;  and  if,  in  truth,  they  took  to  them- 
selves a  large  amount  of  the  Memphis  bank's  good  assets  in  ex- 
change for  paper  which  was  worthless  or  partly  so  to  their  knowl- 
edge, this  would  be  a  scheme  to  defraud  the  bank  and  certainly  its 
stockholders  and  perhaps  its  depositors;  but  Davis  was  not  on 
trial  for  anything  like  that;  no  such  scheme  is  hinted  at  in  the  in- 
dictment; and  it  cannot  be  permitted  that  any  respondent  shall 
be  charged  with  one  crime  and  convicted  of  another  merely  be- 
cause the  latter  is  developed  out  of  the  proof  which  fails  to  show 
the  crime  charged.1 

This  shows  the  circumstances  to  which  Davis  owes  his 
freedom.  It  is  now  nearly  ten  years  since  the  Oklahoma 
City  failure,  and  since  every  one  in  Oklahoma  is  trying  to 
forget  the  past,  it  is  highly  improbable  that  any  further 
charges  will  he  pressed  against  him. 

The  Planters'  and  Mechanics'  Bank,  the  First  State 
Bank,  the  Oklahoma  State  Bank,  and  the  State  Bank  of 
Capitol  Hill  —  all  Oklahoma  City  failures  —  represented 
a  loss  to  the  guaranty  fund  of  nearly  half  a  million  dollars. 
Most  of  these  hanks  were  victims  of  the  hoom.  What  Put- 
nam was  doing  at  Putnam  City  was  duplicated  on  a 
smaller  scale  in  all  parts  of  the  city.  When  this  boom  was 
gathering  momentum  these  banks  made  heavy  loans  to 
various  development  projects  extending  far  into  the  sur- 
rounding country.  When  the  boom  collapsed  they  found 
much  of  this  inflated  real-estate  security  nearly  worthless. 
Thirty  thousand  dollars  of  Putnam  paper  yet  remains 
among  the  uncollectible  assets  of  the  Planters'  and  Me- 
chanics' Bank.  Dishonest  and  incompetent  hanking  tells 

1  Hendrey  r.  United  States,  £33  Federal  Reporter,  5,  13,  16. 


72      THE  GUARANTY  OF  BANK  DEPOSITS 

the  whole  story  of  these  six  Oklahoma  City  failures.  One 
class  of  bankers  was  in  collusion  with  the  speculator;  the 
other  was  the  speculator's  victim  —  together  they  dealt  a 
blow  that  staggered  the  infant  guaranty  system.  It  is 
patent  that  four  or  five  banks  in  Oklahoma  City  had  ac- 
cumulated a  great  part  of  the  speculative  paper  of  this 
boom  period  between  1907  and  1911.  If  there  had  been  no 
guaranty  law  the  dead  weight  of  this  whole  loss  would  have 
fallen  on  the  individuals  of  the  community.  It  is  more 
than  probable  that  this  would  have  proved  a  body  blow 
to  public  confidence  with  consequences  of  great  general 
import.  The  guaranty  law  disseminated  the  shock  over  the 
entire  state,  and,  the  ethics  of  the  case  aside,  permitted  the 
business  life  of  this  city  to  move  on  without  interruption. 

Another  fact  worthy  of  note  is  the  difficulty  of  convicting 
bank  officials  that  have  proved  grossly  recreant  to  duty. 
We  have  already  seen  how  Abner  Davis  wriggled  through 
the  fingers  of  both  the  state  and  the  United  States  courts. 
The  ordinary  banker  is  a  respected  citizen  of  his  community 
and  when  indicted  for  bank  wrecking  is  tried  before  a  jury 
of  his  fellow-citizens.  Under  a  guaranty  law  these  persons 
can  suffer  no  loss  and  this,  coupled  with  local  sentiment, 
makes  convictions  extremely  difficult.  If  all  of  the  Okla- 
homa City  losses  had  fallen  on  the  individuals  of  that  com- 
munity, it  would  have  been  comparatively  easy  to  get 
juries  that  would  have  dealt  summarily  with  such  persons 
as  Abner  Davis.  Many  thoughtful  persons  believe  that 
the  guaranty  fund  should  be  created  in  part  from  a  general 
tax  levy  in  order  that  the  public  may  have  a  more  direct 
interest  in  the  activities  of  bankers,  not  only  while  they 
are  managing  banks,  but  also  when  they  are  later  before 
the  bar  of  justice  for  wrecking  them. 

The  handling  of  these  failed  banks  has  witnessed  a 
marked  step  forward  in  the  manner  of  liquidating  failed 
institutions.  The  old  method  of  liquidating  a  failed  bank 
was  to  put  it  in  the  hands  of  a  receiver.  This  receiver  had 


THE  OKLAHOMA  SYSTEM  73 

little  or  no  expert  knowledge  for  the  task  in  hand.  In  addi- 
tion to  this  there  were  many  onerous  attorney  fees  as  well 
as  other  expenses  incident  to  the  legal  closing  of  the  busi- 
ness. Ineptitude  and  waste  was  the  result  and  the  whole 
burden  of  this  fell  upon  the  depositors  of  the  failed  institu- 
tions. In  most  of  the  states  that  have  guaranty  laws  a  dep- 
uty bank  commissioner  takes  charge  and  liquidates  a  failed 
bank.  This  official  is  a  trained  banker  and  his  salary  is  paid 
from  the  general  funds  of  the  state.  The  result  is  that  the 
assets  are  in  the  hands  of  an  expert  and  every  cent  saved 
goes  back  to  the  depositors.1  This  is  a  great  step  in  ad- 
vance of  the  old  antiquated  receivership,  and  a  step  that 
other  states  may  well  afford  to  follow. 

8.  The  burden  and  the  incidence  of  the  guaranty  assess- 
ments. It  took  but  the  first  few  of  these  fifty-odd  failures  to 
deplete  the  guaranty  fund.  When  the  fund  could  no  longer 
meet  the  losses  the  state  banking  board  began  to  issue  cer- 
tificates of  indebtedness  as  required  by  law.  For  a  few 
years  the  amount  of  these  certificates  issued  was  alarming, 
the  statement  of  the  condition  of  the  guaranty  fund  on 
September  30,  1914,  showing  that  there  was  $20,161.38 
in  cash  on  hand  and  $807,475.09  in  warrants  outstanding 
against  it.2  Since  then  these  warrants  have  been  paid  off  as 
will  appear  later.  To  create  a  market  for  these  warrants 
they  were  made  non-taxable,  legal  security  for  the  deposit 
of  public  funds  and  for  any  other  deposits  that  may  be 
required  by  the  state  treasurer.3  By  these  means  their 

1  An  exception  to  this  general  statement  was  the  liquidation  of  the 
Columbia  Bank  and  Trust  Company.  It  would  be  difficult,  for  the  busi- 
ness in  hand,  to  exaggerate  the  incompetence  of  the  politicians  who  closed 
this  bank.  The  expense  of  this  liquidation  from  September  £9,  1909,  to 
January  30,  1911,  was  814,9i*.70,  of  which  amount  $8,750  represented 
attorney  fees.  See  Report  of  Arthur  Young  <fr  Company,  pp.  59-61. 
This  practice  of  hiring  special  attorneys  was  soon  after  abandoned  and 
now  work  of  this  nature  is  under  the  care  of  the  Attorney-General. 

1  Fourth  Hifnnial  Kfport  of  the  Rank  Commissioner. 

1  Banking  Lava  of  the  State  of  Oklahoma,  section  47. 


74      THE  GUARANTY  OF  BANK  DEPOSITS 


standing  was  maintained  in  the  eyes  of  the  public  and  on 
them  enough  money  was  borrowed  to  pay  depositors  as 
required  by  law.  But  these  warrants  do  not  show  that  the 
whole  burden  of  the  system  was,  for  the  time  being,  shifted 
to  the  future.  When  the  Columbia  Bank  and  Trust  Com- 
pany failed  the  emergency  assessment  was  made  three 
fourths  of  one  per  cent  of  average  daily  deposits,  and  on 
March  2,  1911,  this  was  increased  to  one  per  cent.  The 
following  table  gives  the  data  regarding  the  assessments 
for  the  various  years: 


Year 

Percentage 

assessment 

Average  daily 
deposits  of  preceding 
year* 

Assessment 

1908  

1 

$19,883,663 

$198,836.63 

1909  

1  Increase  t 

5,214,011 

52,140.11 

1909  

1/5 

25,097,674 

50,195  34 

1909  

3/4  Special 

30,006,966 

225,052.23 

1910  

1  Increase 

19,603,175 

196,031.75 

1910  

1/5 

44,700,849 

89,401.69 

1911  

1  Increase 

2,914,879 

29,148.79 

1911  

1/5 

47,615,728 

571,388.73 

1912  

19/20 

53,795,163 

511,054  04 

1913  

2/5 

50,456,166 

201,824  66 

1914  

2/5 

37,021,000 

148,084  00 

1915  

2/5 

40,454,322 

161  817  29 

1916  

1/5 

44,981,826 

89  963  65 

1917  

1/5 

66,677,846 

133,355  69 

1918  

1/5 

104,400,000 

208  800  00 

1919  

1/5 

115,981  000 

231  962  00 

1920  

1/5 

150,829,000 

301  658  00 

Totals  

$859,633,268 

$3,400,714.60 

*  The  average  daily  deposits  as  given  in  the  1908  column  are  not  those  for  the  preceding 
year,  1907,  for  there  are  no  statistics  of  average  daily  deposits  before  statehood.  The 
deposits  on  which  the  first  assessment  was  based  were  those  as  shown  by  the  bank  examina- 
tion made  before  the  law  went  into  operation.  See  the  First  Annual  Report  of  the  State 
Banking  Board,  p.  4. 

t  It  will  be  remembered  that  the  original  law  provided  that  in  the  event  the  average  daily 
deposits  of  any  bank  should  be  larger  for  the  succeeding  year,  it  was  required  to  pay  an 
assessment  equal  to  1  per  cent  of  the  increase.  This  provision  was  removed  from  the  law 
by  an  amendment  in  1911. 

Since  the  first  special  assessment,  which  occurred  in 
1909,  was  not  levied  on  the  average  daily  deposits  of  the 


THE  OKLAHOMA  SYSTEM  75 

preceding  year,  it  is  apparent  that  this  item  in  the  table 
causes  a  duplication  to  the  amount  of  $25,097,674  in  the 
deposits  for  that  year.  If  this  amount  is  subtracted  from 
the  total  average  daily  deposits,  $859,633,268,  and  the 
remainder  divided  into  the  total  assessments,  $3,400,714.60, 
the  quotient  is  .408,  or  the  average  annual  rate  per  cent 
which  one  hundred  dollars  of  deposits  has  been  assessed 
over  this  twelve-year  period.  Since  the  deposits  of  the 
Oklahoma  banks  have  averaged  considerably  over  five 
times  their  capital  stock  this  average  annual  rate  of  assess- 
ment of  .408  per  cent  of  deposits  is  in  the  neighborhood 
of  3  per  cent  of  the  average  capital  stock  of  the  banks. 
Thus  the  total  assessments  for  the  twelve  years  have 
taken  about  36  per  cent  of  the  average  capital  stock  of 
the  banks.1  To  date  the  banks  have  paid  in  almost  three 
and  a  quarter  million  dollars  in  assessments.  Up  to 
November,  1912,  the  assessments  of  the  Oklahoma  State 
Bank  of  Muskogee  had  amounted  to  $17,010.40.*  Mr. 
Thornton  Cooke  gives  the  following  as  special  cases  related 
to  him:  * 

In  four  years  one  bank  of  $50,000  capital  paid  $13,000  assessments 


50,000 
50,000 
10,000 
15,000 
5,000 
30,000 


10.000 

15,000 

1,300 

3,000 

2.255 

20,000 


These  figures  show  the  tremendous  burden  which  the 
guaranty  system  placed  upon  the  state  banks  during  the 
first  few  years  when  special  assessments  were  frequent  and 
onerous.  In  some  instances  where  banks  enjoyed  especially 
large  deposit  accounts,  bankers  assert  that  for  a  few  years 
their  annual  assessments  equaled  ten  per  cent  of  capital 

1  This  is  not  a  weighted  average,  but  it  will  suffice  to  show  the  general 
situation. 

1  Commercial  and  Financial  Chronirlt,  Nov.  2.  1912,  p.  1172. 
*  (Quarterly  Journal  of  Economic;,  November,  1913,  p.  86. 


76      THE  GUARANTY  OF  BANK  DEPOSITS 

stock.  In  the  four  years  1908,  1909,  1911,  and  1912  the 
annual  assessments  averaged  about  five  per  cent  of  capital 
stock.  It  is  patent  that  an  annual  assessment  equal  to  five 
per  cent  of  capital  stock  trenches  seriously  on  dividends. 
In  1908  Mr.  James  B.  Forgan,  then  president  of  the  First 
National  Bank  of  Chicago,  made  an  investigation  as  to  the 
earning  power  of  deposits.  Based  on  the  statistics  of  his 
bank  for  the  past  eight  years,  after  allowing  five  per  cent 
on  the  average  capital  employed,  the  average  net  profit  on 
deposits,  including  revenue  from  all  sources,  was  just  three 
quarters  of  one  per  cent.1  If  these  figures  are  trustworthy 
the  assessments  in  Oklahoma  for  the  first  five  years  were 
more  than  the  net  earning  power  of  the  deposits. 

The  question  at  once  arises,  Who  in  the  final  analysis  has 
really  borne  the  prodigious  burden  of  this  experiment? 
The  state  bankers,  of  course,  sustained  the  impact  of  the 
tax,  but  it  is  far  from  certain  that  the  burden  finally  re- 
posed there.  Insurance  is  a  scheme  for  providing  indem- 
nity and  for  scattering  the  effects  of  a  disaster  over  the  mem- 
bers of  a  group  —  a  disaster  which  otherwise  would  have 
fallen  with  crushing  blow  upon  some  few  individuals  of  the 
group.  Each  member  of  the  group,  recognizing  the  aleatory 
nature  of  the  impending  danger,  chooses  to  contribute 
regularly  a  known  amount  in  order  to  remove  the  possibili- 
ties of  a  much  greater  disaster.  Thus,  in  insurance  the 
normal  thing  is  for  the  person  insured  to  bear  the  costs  of 
his  own  insurance.  It  is  true  that  insurance  may  be  philan- 
thropy, but  there  is  little  philanthropy  in  business.  Where 
the  state  imposes  an  insurance  contribution  upon  an  enter- 
priser it  becomes  to  him  one  of  the  costs  of  his  business  and 
must  be  met  somewhere.  In  the  long  run  any  business  must 
bear  its  own  expenses,  or,  in  the  language  of  the  street,  "the 
consumer  pays  the  freight."  Some  of  the  coal  companies  in 
Pennsylvania,  when  invoicing  a  car  of  coal  boldly  add  five 
cents  per  ton  and  mark  it  "state  workmen's  compensation 
1  Forgan,  Guaranty  of  National  Bank  Deposits  (pamphlet),  p.  16. 


THE  OKLAHOMA  SYSTEM  77 

tax."  !  The  problem  before  us  is  whether  the  State  of 
Oklahoma  has  compelled  the  state  bankers  to  assume  the 
burden  incident  to  insuring  the  depositing  public. 

It  is  a  commonplace  that  every  tax  has  a  tendency  to 
be  shifted.  Professor  Plehn  says  regarding  the  taxation 
of  mortgages: 

In  California  the  attempt  was  made  to  compel  the  lender  to 
pay  the  tax  by  at  least  making  him  advance  it.  But  it  became 
evident,  however,  that  he  shifted  the  tax  to  the  borrower,  whose 
last  state  was  worse  than  his  first,  because  he  had  to  pay  not  only 
the  tax,  but  the  cost  of  shifting  as  well.1 

Methods  of  shifting  taxes  are  almost  myriad.  If  it  seems 
inexpedient  to  the  manufacturer  to  increase  the  price  of 
his  finished  product  he  may  accomplish  his  purpose  by 
employing  a  slightly  inferior  grade  of  raw  material  in  the 
manufacturing  process.  The  assessment  that  a  bank  must 
pay  to  the  guaranty  fund  is  in  every  respect  a  tax.  A  bank 
might  shift  this  burden  in  various  ways  —  it  might  main- 
tain an  inferior  plant,  it  might  extend  less  liberal  banking 
accommodations  of  various  kinds  to  the  public;  finally,  it 
might  boldly  raise  the  interest  rate  to  the  borrower.  Discus- 
sion of  the  first  two  methods  will  be  summarily  dismissed, 
for  it  is  impossible  to  present  definitive  proof  one  way  or  the 
other.  As  regards  equipment  persons  conversant  with  con- 
ditions throughout  the  country  ridicule  the  idea  that  there 
is  any  difference  when  comparable  conditions  are  consid- 
ered, and  certainly  it  would  seem  an  exaggeration  to  say 
that  the  general  public  in  Oklahoma  suffer  in  this  respect  as 
compared  wTith  persons  in  other  states.  But  this  is  impres- 
sion, not  statistical  proof.  The  same  thing  seems  to  be  true 
as  regards  the  liberality  of  banking  practices.  As  a  rule  the 
Oklahoma  banks  pay  one  per  cent  higher  rate  on  time  cer- 
tificates of  deposit  than  is  the  custom  in  most  other  states. 
With  respect  to  special  charges  for  other  banking  services, 

1  American  Industrif»,  April.  1916,  p.  44. 

*  Introduction  to  Public  Finance  (revised  ed),  p.  276. 


78      THE  GUARANTY  OF  BANK  DEPOSITS 

again  it  is  impossible  for  the  stranger  to  detect  any  differ- 
ences. These  general  practices  seem  to  be  the  same  as 
those  obtaining  in  other  states.  There  remains  the  question 
of  a  higher  interest  rate  to  the  borrower. 

There  might  be  a  possibility  that  the  guaranty  law  has 
attracted  sufficient  additional  deposits  to  the  state  banks 
to  make  the  additional  profits  from  this  source  offset  the 
onerous  assessments.  In  such  a  case  the  burden  would 
have  an  offset.  For  a  time  the  deposits  of  the  state  banks 
greatly  increased.  The  advertising  the  law  received  in  the 
early  political  campaigns,  the  rush  to  organize  new  banks, 
and  the  conversion  of  national  banks  all  contributed  to  this 
end.  When  the  failures  began  to  occur  the  state  banks 
nationalized  by  the  score.  Through  all  the  storm  the  na- 
tional banks  have  retained  the  confidence  of  the  public 
until  now,  although  the  state  banks  outnumber  the  national 
almost  two  to  one,  the  national  banks  hold  fully  two  thirds 
of  the  total  deposits  of  the  state.  It  is  hard  to  see,  there- 
fore, where  the  law  has  been  a  sufficient  boon  to  the  state 
banks  to  offset  its  burdens. 

The  general  theory  of  the  shifting  and  the  incidence  of 
taxation  is  based  upon  long-run  conditions.  It  is  a  part  of 
the  theory  that  the  person  who  advances  the  tax  regards 
it  as  a  hardship  and  consequently  looks  about  for  some 
avenue  of  escape.  But  this  part  of  the  theory  of  tax-shift- 
ing does  not  quite  fit  the  matter  in  hand.  In  the  first 
place,  when  the  law  was  passed  most  of  the  banks  antici- 
pated that  it  would  be  a  great  deposit-getter.  They  felt 
that  its  benefits  would  far  outweigh  the  costs  and  they 
undoubtedly  approached  the  matter  in  a  frame  of  mind 
quite  different  from  that  of  the  man  who  recoils  under  the 
impact  of  a  tax.  Finally,  the  heavy  special  assessments 
were  concentrated  in  a  comparatively  few  years,  and  it  is 
doubtful  if  the  banks  regarded  them  as  a  permanent  handi- 
cap. Consequently  the  obsession  of  mind  on  the  part  of 
the  taxpayer  who  contrives  to  shift  the  burden  and  the 


THE  OKLAHOMA  SYSTEM  79 

long-run  conditions  that  are  so  necessary  for  the  general 
theory  of  tax-shifting  were  hardly  present. 

There  was  an  important  influence  at  work  tending  to 
compensate  the  state  banks.  When  the  law  was  passed  it 
provided  that  state  banks  could  not  pay  a  higher  rate  of 
interest  on  time  deposits  than  that  permitted  by  the  bank 
commissioner.  This  rate  was  placed  at  four  per  cent.  The 
state  banks  were  thus  paying  only  four  per  cent  on  such 
deposits,  while  their  competitors  were  paying  all  the  way 
from  four  to  ten  per  cent.  It  is  patent  that  if  the  guaranty 
law  did  no  more  than  assist  a  bank  in  holding  its  deposits 
at  a  lower  rate,  this  regulation  regarding  the  rate  of  interest 
would  place  the  state  banks  in  an  advantageous  position. 
No  doubt  this  was  of  some  consequence. 

It  must  be  remembered  that  the  state  banks  are  working 
in  competition  with  the  national  banks,  which  are  not  sub- 
ject to  the  law.  At  first  blush  this  competition  would  seem 
to  make  it  impossible  for  the  state  banks  to  shift  the  bur- 
den. But  often  this  competition  is  more  nominal  than  real. 
As  a  rule  the  national  banks  are  the  large  banks  of  the 
state;  they  operate  in  the  larger  cities  and  towns;  and  their 
clientele  consists  of  the  larger  borrowers.  At  many  points 
these  two  banking  systems  do  not  come  into  competition. 
Where  they  do  come  into  competition  it  is  quite  possible 
that  the  result  is  just  the  reverse  of  what  might  be  ex- 
pected. In  this  case  both  kinds  of  banks  are  competing  for 
the  same  market.  The  guaranty  assessment  places  a  hand- 
icap on  the  state  banks,  with  the  result  that  they  cannot 
cut  the  rate  below  a  certain  point.  The  national  banks, 
occupying  an  advantageous  position  in  this  regard,  accept 
the  rate  of  the  state  banks  and  thus  do  not  compete.  For 
this  reason  it  is  doubtful  if  the  competition  of  the  national 
banks  is,  after  all,  any  competition  at  all.  From  the  stand- 
point of  abstract  reasoning,  therefore,  the  final  incidence 
of  the  guaranty  assessments  is  most  complicated  and  un- 
certain. 


80      THE  GUARANTY  OF  BANK  DEPOSITS 


Attention  is  now  called  to  some  of  the  actual  conditions 
regarding  the  interest  rate  in  Oklahoma.  In  1915  the 
Comptroller  of  the  Currency  collected  statistics  as  to  the 
rates  of  interest  charged  by  the  national  banks  in  the  vari- 
ous states.1  The  figures  refer  only  to  national  banks  and 
show  the  number  of  banks  charging  twelve  per  cent  or 
more  on  some  loans.  The  following  table  gives  the  figures 
for  Oklahoma  and  neighboring  states: 


Toted  number 
<tf  national  banks 

Number  charging 
12  per  cent  or  more 
on  some  loans 

Percentage  charging 
12  per  cent  or  more 

Oklahoma  

351 

287 

81.7 

Texas  

535 

168 

31.4 

Kansas   

217 

21 

9  7 

Arkansas  

61 

7 

11.5 

Missouri  

131 

19 

14.5 

This  table  shows  that  81.7  per  cent  of  the  national  banks 
in  Oklahoma  were  charging  12  per  cent  or  more  on  some  of 
their  loans.  This  percentage  was  greater  than  that  of  any 
other  state.  In  fact,  there  were  almost  twice  as  many 
offending  banks  as  hi  Texas,  the  next  lowest  state.  There 
are  no  figures  available  for  the  state  banks,  but  it  is  safe  to 
say  that  practically  all  of  them  were  guilty  of  the  same 
practice.  The  tenant  cotton-grower,  and  in  some  sections 
especially  the  negro  tenant,  is  the  principal  cause  of  this 
acute  interest  condition.  The  worldly  goods  of  the  typical 
cotton  tenant  consist  of  a  team,  a  wagon,  a  cow,  and  a 
family.  Generally  some  part  of  this  outfit  is  mortgaged. 
To  get  out  a  crop  this  tenant  has  to  borrow  money,  giving 
the  anticipated  crop  as  security  for  the  loan.  The  bank 
loaning  him  money  is  running  two  grave  risks  —  that  of  a 
poor  crop  and  the  probability  of  the  tenant  moving  on  to 
another  community.  The  chronic  incapacity  of  the  tenant 
keeps  him  the  victim  of  the  money-lender.  Banks  in  these 
1  Report  of  the  Comptroller  of  the  Currency,  1915,  vol.  i,  p.  28. 


THE  OKLAHOMA  SYSTEM 


81 


rural  sections  have  little  competition  in  this  kind  of  busi- 
ness, and  this,  combined  with  the  hazard  element  in  the 
loan,  causes  the  banks  to  adopt  the  policy,  "Get  all  you 
can  get."  Early  in  1916  the  Oklahoma  state  legislature 
passed  a  stringent  anti-usury  law,  revoking  the  charter  of 
the  banks  guilty  in  the  future  and  denying  them  access  to 
the  state  courts  to  collect  usurious  loans. 

The  general  high  rate  over  the  state  is  due  to  a  plurality 
of  causes.  In  a  new  state  such  as  Oklahoma  has  been  in  the 
past,  there  is  little  accumulated  capital.  The  demand  for 
capital  for  developmental  purposes  far  outruns  the  availa- 
ble supply.  Furthermore,  in  such  new  communities  values 
are  very  unsettled,  consequently  the  element  of  hazard  in  a 
loan  is  great.  The  interest  rate  is  thus  made  up  of  two 
parts  —  the  pure  interest  rate,  determined  by  the  supply 
of  and  demand  for  capital,  plus  an  insurance  rate  to  cover 
the  element  of  hazard  in  the  loan.  In  the  past  both  of  these 
elements  have  made  for  high  interest  rates  in  Oklahoma.  In 
addition  to  this  is  the  burden  of  the  guaranty  assessments. 
It  is  manifestly  impossible  to  allocate  to  these  several  fac- 
tors their  exact  share  in  the  cause  of  high  interest  rates. 

While  we  cannot  measure  directly  the  effects  of  the 
guaranty  law  on  interest  rates,  we  can  determine  pretty 
accurately  how  the  state  banks  have  prospered  under  its 
operation.  The  following  table  shows  the  average  annual 
dividends  declared  by  the  state  banks  in  Oklahoma  as  well 
as  for  the  state  banks  in  neighboring  states: 


1811* 

(per  cm/) 

181*» 

(ptrcent) 

1013 

(per  ernt) 

lOllt 
(prr  ami) 

lout 

(per  crnt) 

Oklahoma  

15.7 

16.8 

15.8 

17  9 

15.7 

Kansas  

12.3 

12.0 

Missouri  

11.5 

11  3 

Arkansas  

10  0 

92 

Texas  

110 

11.0 

*  Bank  r<>mmi««ionrr.  in  «<]<lrru  before  itate  banker*.  December  0.  10 IS. 
f  Report  q/Uu  ComptnUtr  tf  Uu  Currmry.  1014  mad  1015. 


82      THE  GUARANTY  OF  BANK  DEPOSITS 

There  are  no  figures  available  for  the  last  four  states 
prior  to  1914,  but  as  conditions  have  been  normal  in  these 
states  the  figures  for  the  years  1914  and  1915  show  the 
general  condition.  It  will  be  remembered  that  the  assess- 
ments for  1911  and  1912  in  Oklahoma  equaled  about  five 
per  cent  of  capital  stock.  If  these  assessments  were  not 
shifted  the  dividends  plus  the  assessments  would  have 
been  about  twenty-one  per  cent,  or  nearly  twice  the  earn- 
ings of  state  banks  in  neighboring  states.  The  problem  is 
far  too  complex  to  warrant  any  dogmatic  conclusion  that 
the  banks  have  passed  the  burden  on  to  the  borrowing 
public,  but  the  above  figures  provoke  a  grave  suspicion. 

The  real  effect  of  the  guaranty  assessments  was  in  all 
probability  not  so  much  to  raise  interest  rates  as  it  was  to 
retard  the  gradual  fall  that  was  taking  place.  As  already 
indicated,  interest  rates  are  extremely  high  in  newly  set- 
tled countries.  As  capital  accumulates  and  frontier  condi- 
tions give  way  to  settled  life,  the  interest  rate  gradually 
falls  until  it  becomes  consonant  with  rates  in  older  states. 
This  process  has  been  going  on  apace  in  Oklahoma.  Prob- 
ably the  real  effect  of  the  guaranty  burden  was  to  retard 
this  decline.  In  so  far  as  this  is  so,  all  borrowers  from 
banks,  both  state  and  national,  have  been  affected.  It  is 
safe  to  say  that  interest  rates  in  Oklahoma  average  from 
one  to  three  per  cent  higher  than  in  the  neighboring  State 
of  Kansas,  notwithstanding  the  fact  that  Oklahoma  now 
has  as  much  wealth  as  the  latter  state  and  nearly  half  a 
million  more  people.  It  would  be  interesting  to  know  the 
nature  of  the  friction  that  is  retarding  further  decline. 

9.  The  effects  of  the  law  on  the  state  and  the  national  banks. 
So  far,  in  considering  the  Oklahoma  experiment,  we  have 
dwelt  upon  the  initiation  of  the  bank-guaranty  idea  in 
Oklahoma,  the  characteristics  of  the  Oklahoma  law,  and 
have  traced  the  history  of  the  guaranty  fund  and  the  bank 
failures.  With  these  facts  in  mind  we  now  turn  to  a  con- 


THE  OKLAHOMA  SYSTEM  83 

siderat  ion  of  the  relations  of  the  banks  and  of  the  people 
to  the  law. 

It  will  be  remembered  that  the  Oklahoma  bank-guar- 
anty law  was  born  in  the  throes  of  the  panic  of  1907.  This 
tie-up  of  currency  worked  a  real  hardship.  The  law  was 
presented  to  the  public  as  a  panacea  for  this  very  thing. 
Consequently  the  effects  of  the  law  have  been  more  pro- 
nounced than  in  any  other  state.  These  effects  show  most 
conspicuously  in  the  relative  growth  of  the  deposits  of  the 
state  and  the  national  banks,  and  in  the  relative  changes  in 
number  of  the  same  banks. 

On  March  1,  1908,  the  individual  deposits  of  the  state 
banks  were  $18,032,000.  By  November  16,  1909,  these 
had  increased  to  $49,775,000,  or  an  increase  of  over  175 
per  cent.1  On  the  same  dates  the  individual  deposits  of  the 
national  banks  in  Oklahoma  were  $38,298,000  and  $41,- 
617,000  respectively,  or  an  increase  of  less  than  9  per  cent.2 
On  March  1,  1908,  there  were  470  state  banks  in  Okla- 
homa. By  November  16,  1909,  there  were  662.3  This  was 
an  actual  increase  of  192  banks,  or  41  per  cent.  On  the 
same  dates  the  number  of  national  banks  in  Oklahoma 
was  312  and  220  respectively.4  This  was  an  actual  de- 
crease of  92  banks,  or  30  per  cent.  These  figures  show  that 
the  bank-guaranty  law,  coming  at  the  psychological  mo- 
ment, caught  the  public  ear.  This  great  increase  in  de- 
posits of  state  banks  undoubtedly  shows  that  the  public 
preferred  the  guaranteed  banks.  But  this  is  not  the  whole 
explanation.  The  bankers  of  the  state  greatly  overesti- 
mated the  ability  of  the  law  to  attract  deposits.  Some  of 
the  national  banks,  being  deprived  of  the  benefits  of  the 
law,  felt  compelled  to  renounce  their  national  charters  and 
incorporate  under  the  state  laws.  Besides  this  conversion 
of  national  banks  there  were  100  new  state  banks  organized 

1  Second  Rifnnial  Report  of  the  Rank  Commissioner,  pp.  xxvii-xxviii. 
1  Ibid.,  pp.  xxx-xxxii.  '  Ibid.,  pp.  zivii-xxviii. 

*  Ibid.,  pp.  xxx-xxxii. 


84      THE  GUARANTY  OF  BANK  DEPOSITS 


between  the  two  above-mentioned  dates.  A  regular  mania 
for  bank  organization  broke  out.  Small  banks  with  a 
minimum  of  capitalization  sprang  into  existence  in  nearly 


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-  Number  of  State  Banks 

-  Number  of  National  Banks 


Mch.l 
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Percentage,  not  absolute  changes  are  plotted 

every  hamlet  of  the  young  commonwealth.  The  bank 
commissioner  stated  that  more  than  three  hundred  appli- 
cations for  state-bank  charters  were  on  file  in  his  office.1 
The  principal  cause  of  this  phenomenal  growth  of  state- 
bank  deposits  was  the  conversion  of  the  92  national  and 
1  Quarterly  Journal  of  Economics,  1913,  28:  88. 


THE  OKLAHOMA  SYSTEM 


85 


the  organization  of  the  100  new  state  banks.  This  growth 
of  state  banks  kept  up  until  1911,  when  on  January  7  of 
that  year  their  number  was  695,  with  deposits  aggregating 


210  

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1908          1909         1910          1911          1912         1918           1914         1 

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.  Deposit*  of  State  Banks 
.  Deposits  of  National  Bank* 


Percentage,  not  absolute  chancea  axe  plotted 

$54,756,000. l  The  state  banks  had  been  chafing  for  some 
time  under  the  burden  of  the  Columbia  failure,  ^lien  on 
top  of  this  came  about  twenty  other  failures  and  an  emer- 


Third  Biennial  Report  of  the  Bank  Commistioner.  p.  xxxiii. 


86      THE  GUARANTY  OF  BANK  DEPOSITS 

gency  assessment  of  one  per  cent  of  deposits,  the  burden 
became  serious.  In  January  of  the  same  year  came  the 
decision  of  the  United  States  Supreme  Court  upholding  the 
constitutionality  of  the  law.  This  decision  removed  all 
uncertainty  as  to  the  possibility  of  the  system  being  termi- 
nated by  the  courts,  and  the  exodus  from  the  state  banking 
system  began. 

On  January  7,  1911,  there  were  695  state  banks  in  Okla- 
homa. By  February  20,  1912,  this  number  had  fallen  to 
628, x  being  an  actual  decrease  of  67,  or  10  per  cent.  On 
January  7,  1911,  the  individual  deposits  of  the  state  banks 
amounted  to  $54,756,000.  By  February  20, 1912,  they  had 
fallen  to  $39,391,000,2  being  a  decrease  of  $15,365,000,  or 
over  18  per  cent.  This  was  for  a  period  covering  about  a 
year,  but  when  we  examine  the  three-months  period  from 
March  7,  1911,  to  June  7,  1911,  we  find  the  tendency  even 
more  striking.  Between  these  two  dates  the  number  of 
state  banks  fell  from  690  to  638,3  a  loss  of  52.  In  this  same 
period  the  individual  deposits  fell  from  $49,723,978  to 
$39,202,440,4  a  loss  of  $10,521,538.  If  we  examine  the  figures 
for  the  national  banks  in  Oklahoma  for  these  same  periods, 
we  find  that  the  movement  was  nearly  the  reverse.  On  Janu- 
ary 7, 1911,  there  were  229  national  banks.  By  February  20, 
1912,  they  had  increased  to  283,5  being  a  gain  of  54,  or 
nearly  24  per  cent.  On  March  7,  1911,  the  individual  de- 
posits of  the  national  banks  amounted  to  $48,169,089,  and 
on  February  20,  1912,  they  were  $53,094,824,6  being  an 
increase  of  $4,925,735.  Again,  if  we  consider  the  three- 
months  period  from  March  7, 1911,  to  June  7, 1911,  we  find 
that  the  national  banks  increased  from  229  to  276,  a  gain 
of  47,  and  individual  deposits  increased  from  $48,169,089 
to  $52,253,351,  a  gain  of  $4,084,262.7 

By  the  beginning  of  1917  this  movement  seems  nearly  to 

1  Third  Biennial  Report  of  the  Bank  Commissioner,  p.  xxxiv. 

2  Ibid..  3  Ibid.,  pp.  xxxiii-xxxiv.  *  Ibid.. 

6  Ibid.,  pp.  xxxvii-xxxviii.  '  Ibid.,  pp.  xxxiii-xxxvii. 

7  Ibid.,  pp.  xxxvi-xxxvii. 


THE  OKLAHOMA  SYSTEM  87 

have  spent  itself.  It  is  true  that  the  number  of  state  banks 
had  decreased  to  547,  being  a  loss  of  148  since  January  7, 
1911,  but  the  national  banks  were  also  decreasing,  num- 
bering only  338  on  December  27,  1916.1  By  this  time  the 
great  wave  of  war-time  deposits  was  flooding  the  banks, 
and  both  the  state  and  national  banks  seemed  to  prosper 
equally.  In  the  next  two  years  the  national  banks,  as  re- 
gards numbers,  did  little  more  than  hold  their  own,  while 
the  state  banks  increased  to  606  by  March  1,  1920.  When 
it  is  considered  that  many  of  the  state  banks  were  capital- 
ized at  $5000  and  $10,000,  and  that  the  minimum  capi- 
talization for  a  national  bank  is  $25,000,  it  is  evident  that 
many  state  banks  could  not  nationalize.  No  doubt  this 
fact  made  the  exodus  to  the  national  system  much  smaller 
than  it  might  otherwise  have  been.  These  figures  show  one 
of  the  most  remarkable  episodes  in  the  financial  history  of 
this  country,  and  they  furnish  a  striking  example  of  how 
legislation  may  disturb  well-established  business  customs 
and  tendencies. 

It  was  the  large  state  banks  that  the  guaranty  law  drove 
into  the  national  system.  The  report  of  the  bank  commis- 
sioner issued  in  1914  showed  43  state  banks  with  a  capi- 
talization of  $5000;  271  with  a  capitalization  of  $10,000; 
and  90  with  a  capitalization  of  $15,000.  There  was  one 
state  bank  with  a  capital  stock  of  $75,000,  and  one  with  a 
capital  stock  of  $100,000.  At  the  same  time  there  were  38 
national  banks  in  Oklahoma  with  a  capital  stock  of  $100,- 
000  or  more.2  This  restriction  of  the  state  banking  system 
to  the  smaller  banks  was  a  more  serious  matter  than  it 
might  seem,  for  it  automatically  increased  the  burden  on 
the  remaining  state  banks  incident  to  paying  off  the  in- 
debtedness of  the  guaranty  fund. 

These  seceding  state  banks  became  involved  in  interest- 
ing legal  complications.  It  will  be  remembered  that  the 

1  Fifth  Biennial  Report  of  the  Bank  Commitnoner,  pp.  28O-84. 

1  Report  of  the  Comptroller  of  the  Currency,  1915,  vol.  II,  pp.  745-57. 


88      THE  GUARANTY  OF  BANK  DEPOSITS 

law  as  amended  in  1909  provided  for  the  creation  of  a 
guaranty  fund  equal  to  five  per  cent  of  average  daily  de- 
posits. One  per  cent  of  this  was  levied  the  first  year,  and 
one  fourth  of  one  per  cent  each  succeeding  year  until  the 
five  per  cent  fund  was  accumulated.  This  spread  the  as- 
sessments over  a  period  of  seventeen  years.  When  the 
large  state  banks  seceded  they  maintained  that  they  were 
liable  for  only  such  assessments  as  fell  due  while  they  were 
yet  state  banks.  The  State  Supreme  Court,  however,  de- 
nied the  right  of  a  bank  to  slip  out  from  under  a  part  of  the 
assessment  in  this  manner.  This  court  decided  that  the 
five  per  cent  assessment  of  1909  was  a  present  existing 
obligation  assumed  by  each  state  bank  and  that  the  sur- 
render of  the  state  charter  did  not  terminate  the  obliga- 
tion.1 This  decision  was  of  special  interest  in  the  light  of 
the  fact  that  the  amendment  of  1913  reduced  this  assess- 
ment from  five  to  two  per  cent  of  average  daily  deposits. 
The  amount  claimed  by  the  state  in  this  action  was  $646,- 
542.14.  However,  the  banks  interested  by  this  decision 
were  granted  a  rehearing,  and  in  June,  1919,  the  State 
Supreme  Court  reversed  itself,  holding  that  the  banks 
were  liable  for  only  such  portion  of  the  assessment  as  fell 
due  while  they  were  yet  state  banks.2  While  this  question 
was  in  litigation  the  state  banking  department  collected 
some  $35,000  or  $40,000  from  a  dozen  or  more  banks.  At 
the  present  time  there  is  no  provision  for  returning  this 
money,  and  it  seems  probable,  therefore,  that  the  banks 
have  lost  it. 

10.  Causes  of  bank  failures.  It  is  evident  that  the  near 
breakdown  of  the  Oklahoma  system  was  caused  by  the 
frequent  and  serious  bank  failures.  Looked  at  broadly, 
these  failures  seem  to  have  been  caused  by  the  operation  of 

1  State  v.  Farmers'  National  Bank  of  Gushing,  150  Pacific  Reporter,  212. 
*  Citizens'  National  Bank  of  Broken  Arrow  v.  State,  184  Pacific  Re- 
porter, 63,  76  Oklahoma,  94. 


THE  OKLAHOMA  SYSTEM  89 

three  forces;  namely,  first,  a  spirit  of  speculation  on  the 
part  of  bank  officials;  second,  weakness  in  the  construction 
and  administration  of  the  guaranty  law  and  the  other  gen- 
eral banking  laws;  and,  third,  changes  in  economic  condi- 
tions incident  to  the  rapid  development  of  the  new  state. 
These  general  causes  are  not  of  equal  importance;  on  the 
contrary,  the  third  is  the  fundamental  one.  It  is  very 
necessary  to  keep  this  fact  clearly  in  mind.  If  certain 
features  of  Oklahoma's  economic  history  are  not  kept  in 
the  foreground  there  will  be  the  grave  danger  of  jumping 
to  the  conclusion  that  bank  guaranty  has  failed,  when,  in 
so  far  as  Oklahoma  is  concerned,  it  has  hardly  had  a  fair 
chance. 

It  will  be  recalled  that  the  first  "run"  for  Oklahoma 
land  occurred  in  1889.  The  second  was  four  years  later 
followed  by  other  less  important  openings.  We  may  say, 
then,  that  what  has  been  accomplished  in  Oklahoma  is  the 
work  of  about  twenty-five  years.  The  population  of  the 
state  in  1920  was  2,027,564.  In  point  of  population  she 
stood  twenty-first  among  the  states  of  the  Union.  In  1912, 
five  years  after  statehood,  the  wealth  of  the  state  had 
passed  the  four  and  one-half  billion  dollar  mark.1  At  that 
date  Oklahoma  stood  fifteenth  in  wealth  among  the  states. 
This  wealth  of  Oklahoma  was  greater  than  the  wealth  of 
Maine,  New  Hampshire,  Vermont,  and  Connecticut  com- 
bined; greater  than  the  combined  wealth  of  North  Caro- 
lina, South  Carolina,  and  Mississippi;  greater  than  the 
combined  wealth  of  Montana,  Idaho,  Wyoming,  New 
Mexico,  Arizona,  Utah,  and  Nevada.  In  1914,  a  typical 
year  before  the  war-time  price  inflation  of  farm  products, 
the  value  of  Oklahoma's  farm  crops  was  about  $158,000,- 
000. 2  Her  cotton  crop  of  that  year  under  normal  crop  con- 
ditions was  worth  about  $63,000,000.*  In  the  same  year 

1  Estimated  Valuation  of  National  Wealth,  185O-191*.  Department  of 
Commerce,  Bureau  of  the  Census. 

1  Year-Book  of  the  Department  of  Agriculture,  1914,  pp.  514-76. 
»  Ibid.. 


90      THE  GUARANTY  OF  BANK  DEPOSITS 

the  value  of  the  live-stock  was  over  $165,000, 000. l  From 
these  figures  it  is  seen  that  as  an  agricultural  state  Okla- 
homa occupies  a  unique  position.  Her  cotton  crop  places 
her  high  among  the  cotton-producing  states,  while  her 
wheat  and  corn  and  live-stock  make  her  comparable  with 
the  great  diversified  farming  states  of  the  Mississippi 
Valley. 

It  was  as  an  oil-producing  state  that  Oklahoma's  rise 
was  most  meteoric.  In  1900  the  output  of  crude  oil  for  the 
state  was  6472  barrels.2  In  1910  the  output  was  52,028,718 
barrels,  and  in  1916,  107,071,715.3  This  output  in  1916 
was  over  a  third  of  the  total  production  of  the  United 
States  and  16,119,779  barrels  in  excess  of  the  production 
of  California,  her  closest  competitor.  The  Gushing  field 
proved  to  be  the  world's  greatest  producer,  and  as  this  field 
was  extended  a  veritable  oil  delirium  seized  the  state. 
Every  one  feared  that  some  one  else  was  pumping  out  the 
oil  from  under  his  land,  with  the  result  that  a  wild  pumping 
race  ensued.  It  is  the  feverish  speculation  that  accompa- 
nied this  marvelous  oil  development  that  interests  us  at  this 
time. 

The  purpose  of  reviewing  these  figures  of  population  and 
wealth  development  is  to  give  an  idea  of  the  rapidity  with 
which  events  have  been  moving  in  that  part  of  the  world. 
All  this  happened  in  the  short  space  of  twenty-five  years. 
A  noticeable  reaction  of  this  on  the  people  of  that  state  is 
shown  in  their  impatience  to  get  a  big  return  on  a  small 
investment.  There  is  a  general  feeling  in  the  state  that  a 
project  that  does  not  give  a  return  of  at  least  ten  per  cent 
net  on  the  capital  invested  is  a  mighty  poor  business.  It  is 
this  desire  for  quick  returns  that  should  be  held  in  mind  as 
other  events  in  the  history  of  the  state  unfold. 

But  Oklahoma  was  experiencing  severe  growing  pains 

1  Year-Book  of  the  Department  of  Agriculture,  1914,  pp.  514-76. 
*  Statistical  Abstract  of  the  United  Slates,  1915,  p.  224. 
8  Ibid.,  1917,  p.  240. 


THE  OKLAHOMA  SYSTEM  91 

during  this  period  of  rapid  development.  "As  a  town  built 
in  a  hurry  is  seldom  well  built,  so  a  society  will  be  sounder 
in  health  for  not  having  grown  too  swiftly."  l  The  un- 
healthy symptoms  of  Oklahoma's  growth  appear  in  the 
boom  that  began  to  gather  momentum  about  1907  and 
collapsed  in  1911  and  1912.  It  was  this  boom  that  proved 
the  undoing  of  so  many  banks,  for  in  it  are  found  crystal- 
lized the  two  arch  bank  wreckers,  namely,  speculation  and 
dishonesty.  We  must  guard  against  the  conclusion  that 
this  boom  was  to  any  appreciable  extent  caused  by  the 
guaranty  law.  A  few  words  regarding  the  relation  of 
booms  to  the  settlement  of  western  land  will  at  once  make 
it  evident  that  it  was  but  a  recurrence  of  a  well-known 
phenomenon. 

These  booms  are  the  result  of  the  pioneer's  confidence 
overreaching  itself.  "Confidence  goes  a  long  way  toward 
success.  And  the  confidence  of  these  Westerners  is  su- 
perb." 2  Charles  Dickens,  also  struck  by  this  western 
characteristic,  gives  us  in  "Martin  Chuzzlewit"  a  glowing 
description  of  "the  thriving  city  of  Eden  as  it  appeared  on 
paper."  But  often  this  confidence  developed  into  reckless- 
ness, and,  building  cities  far  beyond  their  supports,  they 
collapsed  even  faster  than  they  went  up. 

John  James  Ingalls,  of  Kansas,  describes  what  took 
place  in  that  state  about  a  generation  ago: 

This  feverish  period  culminated  in  a  delirium  of  public  and  pri- 
vate credit  known  in  local  history  as  "the  boom  of  1887,"  whose 
frenzy  and  disaster  have  not  been  exceeded  since  the  bursting  of 
the  "Mississippi  bubble,"  or  the  collapse  of  the  "tulipomania" 
of  the  seventeenth  century. 

The  building  of  superfluous  towns,  the  construction  of  un- 
necessary railroads,  the  organization  of  counties,  and  the  location 
of  county  seats,  the  entry  of  public  lands  for  the  sole  purpose  of 
mortgaging  the  inchoate  title  at  excessive  valuations,  became 
established  industries.  The  agents  of  Eastern  companies  eagerly 

1  Bryce,  The  American  Commonwealth  (revised  ed.).  vol.  n,  p.  901. 
1  Ibid.,  p.  898. 


92      THE  GUARANTY  OF  BANK  DEPOSITS 

competed  for  the  privilege  of  placing  loans  upon  quarter-sections 
without  a  fence  or  a  furrow,  often  far  beyond  their  market  value. 
Professional  "  boomers,"  with  a  retinue  of  surveyors  and  cappers 
and  strikers,  invaded  the  state,  bought  and  platted  additions, 
which  they  sold  at  exorbitant  prices  to  resident  and  foreign  specu- 
lators, victims  to  the  epidemic  passion  for  sudden  wealth,  whose 
inexplicable  contagion  infected  the  reason  of  men  with  its  unde- 
tected bacteria. 

The  reaction  came  like  the  "next  morning"  after  a  night  of 
revelry  and  debauch.  The  plunderers  disappeared  with  the  ready 
money  of  the  people,  leaving,  instead  of  anticipated  wealth,  an 
intolerable  burden  of  maturing  indebtedness  upon  deluded  pur- 
chasers. Empty  railroad  trains  ran  across  deserted  prairies  to 
vacant  towns.  Successive  droughts  and  siroccos  destroyed  the 
crops  in  the  western  hah*  of  the  state.  The  laborers,  mechanics, 
and  speculators,  having  erected  costly  business  blocks  that  found 
no  tenants,  and  residences  that  remained  uninhabited,  being 
without  further  occupation,  sought  employment  elsewhere.  The 
population  declined.  Payday  came.  The  coupon  matured.  Taxes 
fell  due.  Creditors  became  clamorous.  Merchants  refused  credit, 
and  public  and  private  treasuries  were  depleted.1 

Kansas  City,  Omaha,  Fort  Worth,  Minneapolis,  and 
Wichita,  Kansas,  are  notable  examples  of  these  speculative 
debauches. 

Kansas  City  started  off  briskly  in  1880,  and  by  1884  had  begun 
to  boom.  Each  year  thereafter  the  boom  increased  in  intensity, 
fury,  and  frenzy,  until  1887,  when  the  real  estate  business  went 
to  pieces  like  the  giving  away  of  an  empty  egg  upon  slight  pres- 
sure.2 

Speaking  of  Kansas  City,  Mr.  Brown  further  says: 

To  the  west  of  Main  Street  there  was  no  business  south  of 
Ninth,  yet  in  1886  a  tract  of  ground  to  the  southwest  of  the  busi- 
ness district,  bordered  on  the  east  by  Baltimore,  on  the  west  by 
Broadway,  on  the  north  by  17th  Street,  and  on  the  south  by  20th, 
sold  at  the  average  price  of  $6250  per  lot  and  fully  $750  per  lot 
was  necessary  to  cut  down  the  limestone  cliffs  to  grade.  The 
nearest  point  to  this  tract  was  nine  blocks  to  the  then  extreme 

1  Writings,  Addresses,  and  Orations,  pp.  478-79. 

2  Quoted  from  a  manuscript  of  Elmer  E.  Brown. 


THE  OKLAHOMA  SYSTEM  93 

southwest  corner  of  the  business  district,  and  the  average  distance 
to  the  nearest  point  of  the  business  district  was  twelve  blocks. 
It  was  mountainous  and  the  streets  were  nearly  impassable.  This 
tract  did  not  again  sell  for  as  much,  although  Kansas  City  has 
doubled  in  population  and  has  been  wonderfully  prosperous,  until 
recently  [about  1912]  when  the  new  Union  Station  was  located 
within  two  blocks  of  it,  since  which  time  it  has  brought  $7500 
per  lot.  When  one  bears  in  mind  that  only  horse-cars  were  then 
considered  as  means  of  transportation,  except  in  the  heart  of  the 
city  where  a  couple  of  cabs  were  used,  he  sees  to  what  extreme 
speculation  had  gone.  In  the  heart  of  the  city  one  piece  of  prop- 
erty sold  so  high  that  it  never  again  recovered.  The  Junction  at 
Delaware,  Main,  and  Ninth  was  sold  to  a  Mr.  Thayer,  of  Boston, 
for  $300,000.  It  was  an  outrageously  high  price  for  it  considering 
that  it  consists  of  a  point  not  equal  in  area  to  one  lot,  and  of  such 
a  shape  that  a  building  of  more  than  twelve  stories  would  be  im- 
practicable for  the  reason  that  in  making  it  higher  too  much 
space  would  be  taken  up  with  elevators.1 

The  boom  at  Wichita,  Kansas,  was  one  of  the  most  re- 
markable in  point  of  wildness  and  sudden  collapse.  A 
series  of  good  crops  in  Kansas  served  to  center  the  atten- 
tion of  the  country  on  that  state  as  a  land  of  promise. 
Wichita  was  situated  in  the  heart  of  one  of  the  richest 
agricultural  sections  of  the  state,  and  to  it  the  city-builders 
flocked.  City  additions  extended  far  out  on  the  open 
prairies.  At  length  the  boom  degenerated  into  the  buying 
and  selling  of  town  lots  on  a  margin. 

Finally  values  reached  such  a  dizzy  height  that  Murdoch  him- 
self [editor  of  the  Wichita  Eagle]  saw  the  catastrophe  ahead,  and, 
without  counseling  with  any  one,  he  one  night  wrote  a  column 
article  that  appeared  in  the  editorial  department  of  his  paper  the 
next  morning  under  the  caption  "Time  to  Call  a  Halt."  He 
pointed  out  that,  substantially,  "one  of  these  days  two  or  three 
million  dollars'  worth  of  property  will  be  dumped  on  the  market, 
no  buyer  will  appear,  and  the  result  will  be  bankruptcy  to  every 
one  concerned."  He  indicated  that  there  was  no  substantial  basis 
for  the  wild  speculations  that  were  Boating;  that  the  bottom  must 
drop  out  and  disaster  ensue.  The  effect  of  that  one  editorial  was 

1  Quoted  from  a  manuscript  of  Elmer  E.  Brown. 


94      THE  GUARANTY  OF  BANK  DEPOSITS 

electrical.  Just  what  it  predicted,  it  caused.  The  speculative 
game  stopped  instantly  and  liquidation  was  inaugurated.  Within 
a  few  hours  men  who  had  calculated  their  holdings  at  millions 
under  the  inflated  valuations  found  themselves  penniless.1 

It  took  Wichita  twenty  years  to  recover  from  this  de- 
bauch. Since  then  her  population  has  trebled,  but  she  has 
not  yet  built  up  all  the  city  additions  laid  out  in  1887. 

Our  objective  is  the  Oklahoma  boom.  The  purpose  of 
the  foregoing  description  of  the  booms  of  a  generation  ago 
is  to  give  a  background,  as  it  were,  for  the  better  under- 
standing of  the  reappearance  of  the  phenomenon  in  Okla- 
homa. The  vital  connection  of  this  boom  to  the  question 
in  hand  can  scarcely  be  overstressed.  The  boom  began  to 
develop  about  the  year  the  guaranty  law  was  enacted  and 
its  collapse  in  1911  and  1912  was  followed  by  the  long 
string  of  bank  failures  that  have  so  grievously  tried  this 
first  guaranty  experiment. 

The  boom  had  its  roots  in  the  very  beginning  of  Okla- 
homa history.  Near  the  end  of  the  last  century  most  of  the 
vacant  land  of  the  West  had  been  taken  up.  When  Oklahoma 
was  opened  to  settlement  the  adventurous  and  enterprising 
from  every  state  flocked  in.  The  admission  of  the  state  to 
the  Union  gave  it  a  national  advertisement.  The  adoption 
of  its  constitution  removed  the  uncertainty  as  to  the  atti- 
tude to  investors,  and  foreign  capital  began  to  flow  in. 
With  the  beginning  of  the  twentieth  century  a  veritable 
wave  of  prosperity  was  sweeping  the  country.  Crop  condi- 
tions were  most  favorable  and  the  virgin  soil  of  Oklahoma 
yielded  most  bounteously.  Cities  appeared  overnight. 
Commercial  and  industrial  enterprises,  which  in  the  older 
sections  of  the  country  had  required  generations  in  which 
to  develop,  sprang  into  existence  in  Oklahoma  in  a  few 
short  years.  "Nothing  succeeds  like  success"  was  the 
spirit  which  permeated  the  air,  the  result  being  that  meth- 
ods and  processes  were  little  questioned. 

1  The  Daily  Oklahoman,  April  22,  1909,  p.  8. 


THE  OKLAHOMA  SYSTEM  95 

Oklahoma  City  is  the  commercial  center  of  the  state  and 
the  figures  showing  the  precocious  development  of  this  city 
will  suffice  to  show  what  was  going  on  all  over  the  state. 
Oklahoma  City  was  founded  April  22,  1889.  Located  in 
the  center  of  the  state  it  is  on  the  dividing  line  between  the 
northern  and  the  southern  elements  of  the  state's  popu- 
lation. In  the  opening  of  1889,  when  the  United  States 
cavalry,  at  noon  of  April  22,  gave  way  before  the  surging 
multitudes,  the  northerners  rushed  down  from  one  side  and 
the  southerners  dashed  up  from  the  other.  The  various 
town-site  companies  of  these  two  sections  came  into  con- 
flict at  Main  Street,  the  most  important  thoroughfare  of 
the  city.  In  a  few  days  the  city  had  a  population  estimated 
at  over  four  thousand.  For  the  next  ten  years  its  growth 
was  gradual,  but  between  1900  and  1910  it  is  said  to  have 
been  the  fastest  growing  city  in  the  country.  In  this  ten- 
year  period  its  population  increased  from  10,037  to  64,205, 
or  over  539  per  cent.  In  1907,  when  the  state  was  admitted 
to  the  Union,  the  federal  census  showed  a  population  of 
32,452.  Three  years  later  the  population  was  64,205,  or 
practically  double.  The  question  on  every  one's  lips  was 
whether  it  would  double  again  in  three  years. 

But  this  was  a  diseased  growth.  We  now  know  that  it 
was  the  result  of  that  "hectic  orgy  of  speculation"  that 
swept  so  many  towns  off  their  feet  in  the  granger  states  a 
generation  ago.  Old  settlers  of  Oklahoma  City,  who  have 
lived  through  the  boom  days  of  Kansas,  are  of  one  accord 
that  what  this  city  did  in  1910  is  exactly  comparable  to  the 
Wichita  of  1886  when  that  city  was  "full  of  supper  and 
distempering  draughts." 

During  this  four-year  period  [1907-11]  people  gambled  reck- 
lessly in  real-estate  futures.  Few  bought  to  improve.  They 
lx)Ught  to  sell  to  some  one  else,  again  to  some  one  else,  and  so  on 
until  the  price  reached  a  limit  beyond  which  no  one  cared  —  or 
dared  —  to  go.  The  last  buyer  was  the  loser.  In  some  cases  these 
last  buyers,  if  they  have  held  on  till  this  time,  will  be  able  to  real- 
ize at  least  a  substantial  part  of  the  price  they  paid;  in  many 


96      THE  GUARANTY  OF  BANK  DEPOSITS 

cases  the  properties  are  practically  worthless  and  will  remain  so 
for  years  to  come.  .  .  .  The  town  lots  with  which  to  gamble  were 
supplied  from  the  surrounding  country.  Schemes  that  now  seem 
visionary  to  every  one  then  looked  like  conservative  development 
projects  to  the  mind  that  had  become  accustomed  to  the  rapid 
whirl  of  things.1 

The  following  table  giving  the  building  permits  and 
bank  clearings  for  Oklahoma  City  shows  vividly  the  course 
of  events: 

Building  permits  2  Bank  clearings  * 

1907 $1,853,629 

1908 1,734,938  $46,182,000 

1909 5,903,270  83,650,000 

1910 5,493,203  122,821,000 

1911 2,828,256  104,853,000 

1912 885,246  85,415,000 

1913 174,727  91,800,000 

1914 1,972,442  115,880,000 

1915 1,166,806  133,100,000 

The  table  of  building  permits  shows  that  there  was 
nearly  a  fourfold  increase  from  1908  to  1909,  reaching  al- 
most six  million  dollars.  In  1910  the  building  craze  was 
almost  as  intense.  Then  came  the  plunge  downward, 
amounting  in  1913  to  less  than  $175,000.  A  great  part  of 
this  building  was  done  on  borrowed  capital.  It  is  patent 
that  when  a  city  is  growing  in  population  from  32,452  to 
64,205  in  three  years,  there  will  be  a  very  urgent  demand 
for  business  houses  of  all  descriptions  as  well  as  apartments 
and  other  dwellings.  This  demand  was  reflected  in  ab- 
normally high  rents.  The  natural  consequence  was  that 
speculators  borrowed  money,  erected  buildings,  with  the 
expectation  of  having  the  margin  between  the  interest 
charge  and  the  rent  pay  for  the  structures  in  a  few  years. 
The  speculator's  early  confidence  in  Oklahoma  was  well 

1  Harlow's  Weekly,  vol.  n,  no.  1,  p.  809. 

2  Annual  Report,  City  Auditor,  Oklahoma  City,  June  1,  1916. 
8  Barlow's  Weekly,  vol.  u,  no.  1,  p.  26. 


THE  OKLAHOMA  SYSTEM 


97 


founded,  but  this  confidence  soon  waxed  into  recklessness. 
The  city  was  temporarily  built  far  beyond  its  supports, 
and  when  a  period  of  depression  passed  over  the  state  many 
of  these  speculators  found  "for  rent"  signs  on  their  build- 
ings and  interest  coming  due  at  the  bank.  It  has  seemed 
most  convenient  to  single  out  one  city  to  show  the  details 
of  this  boom  phenomenon.  It  should  be  borne  in  mind  that 
every  other  city  and  town  of  the  state  was  going  through 
this  same  experience  to  a  greater  or  lesser  degree. 

Attention  must  now  be  turned  to  what  caused  the  boom 
to  break.  It  has  been  noted  that  rich  harvests  in  the 
granger  states  gave  the  initial  impetus  to  the  boom  of  1887. 
It  was  protracted  crop  failures  and  thirty-cent  wheat  that 
rudely  brought  them  to  their  senses.  It  is  significant  also 
that  serious  crop  failures  in  Oklahoma  turned  the  exhila- 
rating period  of  1907  to  1910  into  the  Slough  of  Despond  of 
1911  to  1913. 

The  following  table  shows  the  crop  conditions  in  Okla- 
homa from  1906  to  1912. l  In  each  case,  except  for  hay  and 
cotton,  the  figures  represent  the  average  number  of  bushels 
per  acre.  In  the  case  of  hay  it  is  tons,  and  for  cotton  it  is 
pounds  per  acre: 


l»oa 

1907 

1008 

1009 

1010 

1011 

Corn  

S3  3 

24  4 

24  8 

17  0 

16  0 

6  5 

Wheat  

13.7 

9.0 

11  6 

12  8 

10  3 

8  0 

Oats  

34.3 

15.0 

25  0 

29  0 

30  5 

9  0 

Barley  

29.8 

18.7 

23  0 

23  0 

30  0 

10  0 

Rve  

13.9 

10  0 

13  5 

13  5 

13  7 

9  5 

Potatoes  .... 
Hay  .. 

80.0 
1.4 

70  0 
1  2 

78  0 
1  5 

70  0 
9 

60  0 
1   i 

18  0 
8 

Cotton  

217 

200 

143 

147 

200 

160 

This  table  shows  three  poor  annual  corn  crops,  culminat- 
ing in  that  of  1911  with  but  6.5  bushels  per  acre.  This  was 
a  falling-off  of  74  per  cent  from  the  crop  of  1908  and  40  per 

1  Year-Book  of  the  Department  of  Agriculture,  1914,  pp.  511-78. 


98      THE  GUARANTY  OF  BANK  DEPOSITS 

cent  from  the  poor  crop  of  1909.  The  wheat  crop  of  1911 
was  51  per  cent  short  of  what  it  was  in  1910;  the  oats  crop, 
75  per  cent;  barley,  66  per  cent;  rye,  32  per  cent;  potatoes, 
70  per  cent;  hay,  24  per  cent;  and  cotton,  18  per  cent. 

The  significance  of  this  crop  reversal  can  scarcely  be 
overestimated.  The  great  proportion  of  the  population  of 
Oklahoma  was  engaged  in  agriculture.  In  such  a  commu- 
nity the  size  of  the  crop  represents  the  purchasing  power  of 
the  people.  The  three  years  1906,  1907,  and  1908  show 
bumper  crops  all  along  the  line.  In  these  years  Oklahoma 
was  riding  on  the  crest  of  the  wave.  It  was  a  new  country 
and  its  development  called  for  a  large  outlay  of  capital. 
Farmers  were  buying  farms,  erecting  buildings,  purchasing 
farm  implements,  or  expanding  in  other  lines.  This  also 
increased  the  business  of  the  merchant,  the  tradesman, 
and  the  dealers  of  all  kinds,  and  this  in  turn  stimulated 
commerce  and  transportation.  Optimism  pervaded  the 
air,  with  the  result  that  every  occupation  from  that  of 
farmer  up  was  seeking  a  greater  extension  of  banking  ac- 
commodation. Then  came  the  disastrous  year  of  1911. 
The  purchasing  power  of  the  people  was  more  than  cut  in 
hah*,  with  the  result  that  the  merchant  or  the  banker  who 
was  carrying  the  farmer  had  to  wait.  This  reversal  would 
have  been  serious  even  under  normal  conditions,  but 
Oklahoma,  caught  on  the  giddy  heights  of  inflated  values 
and  credit  expansion,  "slipped  down  into  the  trough  of  the 
sea." 

These  crop  failures  precipitated  a  severe  contraction  in 
values.  Not  only  had  cities  been  overbuilt,  but  farm-land 
values  were  affected  as  well.  Conservative  real-estate  men 
in  Oklahoma  estimate  that  the  inflated  values  of  1910  had 
shrunk  nearly  fifty  per  cent  by  1912  and  1913.  It  required 
five  years  to  return  to  normal  conditions.  In  this  rapid 
recovery  the  state  was  fortunate,  for  many  cities  in  the 
granger  states  were  nearly  twenty  years  expiating  their 
follies  of  1885  to  1887.  The  return  of  good  crops,  the  rising 


THE  OKLAHOMA  SYSTEM  99 

values  taking  place  over  the  entire  country,  plus  the  resili- 
ent power  of  a  rapidly  growing  state,  all  hastened  the  re- 
turn to  normal  conditions. 

With  this  view  of  the  state's  economic  development  be- 
fore us  as  a  background,  we  are  now  able  to  see  how  the 
banks  became  involved  in  this  era  of  speculation.  A  quota- 
tion from  the  report  of  the  Wisconsin  banking  committee 
will  give  a  good  idea  of  the  manifold  fields  open  to  the 
speculator: 

The  state  is  new  and  undeveloped.  It  is  rich  in  its  natural 
resources.  It  presents  vast  opportunities  for  the  investment  of 
capital,  and  is  a  land  of  promise  for  the  speculator.  It  is  rapidly 
increasing  in  population,  and  money  from  other  states  is  flowing  in 
at  a  rapid  rate.  Its  citizens  are  comparative  strangers  to  each 
other,  business  conditions  have  not  become  settled,  and,  generally 
speaking,  reputations  in  the  financial  world  for  conservatism  and 
financial  probity  have  not  been  established.  Oil  fields  and  coal 
mines  and  many  other  propositions  are  still  to  be  developed. 
Street  railways  remain  to  be  built.  Lighting  companies  are  yet 
to  be  exploited  and  water  works  still  remain  to  be  established.  It 
will  thus  be  seen  that  alluring  propositions  constantly  spring  up, 
tempting  investment  by  men  of  capital  and  the  banker  who  has 
control  of  the  trust  funds  of  his  depositors.1 

Any  situation  in  which  a  bank  lends  assistance  to  a  spec- 
ulator is  fraught  with  great  public  danger.  But  the  situa- 
tion is  doubly  perilous  if  the  banker  is  at  the  same  time 
the  speculator.  It  is  where  the  anticipated  profits  are  to 
be  won  by  the  banker  himself  that  his  judgment  be- 
comes most  fallible.  Regarding  this,  Mr.  James  B.  Forgan, 
former  president  of  the  First  National  Bank  of  Chicago, 
says: 

I  have  seen  many  bank  failures  in  the  past  thirty  years,  but  all 
that  I  have  ever  known  have  had  one  and  the  same  cause,  namely, 
the  management  making  loans  directly  or  indirectly  to  itself. 
I  have  known  incompetent  bankers  make  heavy  losses  by  bad 

1  Report  of  the  Special  Committee  on  Banking,  Wisconsin  Legislature, 
p.  7. 


100    THE  GUARANTY  OF  BANK  DEPOSITS 

loans  and  lose  their  positions  on  that  account,  but  I  have  never 
known  a  bank  to  fail  or  get  into  a  failing  condition  where  the 
officials  had  no  personal  interest  in  the  loss.1 

If  proof  were  needed  that  the  banks  became  involved  in 
this  speculation,  it  would  only  be  necessary  to  rehearse 
again  the  sordid  story  of  the  bank  failures.  The  details  of 
these  failures  have  already  been  set  forth.  It  is  sufficient 
here  to  reemphasize  the  fact  that  they  all  tell  the  same 
story  —  a  welter  of  oil  speculation,  town-site  promotions, 
and  honest  incompetence,  followed  by  a  shrinkage  of  val- 
ues, absconding  and  suicide  of  bank  officials,  and  far  too 
few  jail  sentences. 

After  it  is  all  over  it  is  easy  to  see  how  these  banks  were 
caught.  With  the  development  of  the  boom  credit  became 
unduly  extended  and  this  expansion  of  credit  was  pyra- 
mided upon  the  bank.  Much  of  this  credit  had  directly  or 
indirectly  a  real-estate  foundation.  When  a  boom  is  on  the 
upward  swing  real-estate  loans  are  a  liquid  asset,  for  real 
estate  will  then  change  hands  as  easily  as  war  stocks. 
When  the  reverse  movement  comes  and  the  boom  hits  its 
trough,  so  to  speak,  real  estate  is  the  most  unliquid  of  as- 
sets. The  depression  has  snuffed  out  the  anticipated  profits 
from  this  source  and  no  one  will  touch  it.  Thus  the  banks, 
with  demand  liabilities  staring  them  in  the  face,  found  a 
mass  of  unliquid  assets,  shrunk  in  value,  on  their  hands. 
There  could  be  but  one  result.  The  state  had  permitted 
too  much  incompetent  banking  for  the  ordinary  bank  to 
stand  the  strain  and  a  crash  came. 

We  have  now  seen  the  economic  forces  operating  to 
effect  the  downfall  of  banks.  To  make  the  story  complete 
we  must  revert  again  to  politics  and  weave  in  the  political 
threads  that  have  so  colored  this  initial  bank-guaranty 
experiment. 

The  State  of  Oklahoma  as  now  constituted  is  the  result 
of  the  artificial  welding  of  the  two  dissimilar  civilizations 
1  Bankers'  Magazine  (N.Y.),  76:224. 


THE  OKLAHOMA  SYSTEM  101 

of  Oklahoma  and  Indian  Territories.  As  already  pointed 
out  l  Oklahoma  Territory  possessed  a  general  banking  law 
and  at  least  a  semblance  of  banking  regulation.  But  such 
was  not  the  case  with'  Indian  Territory,  where  banks  were 
not  even  required  to  incorporate.  Such  were  the  conditions 
at  statehood,  and  four  weeks  later  Oklahoma's  now  famous 
bank-guaranty  law  threw  a  blanket  insurance  over  these 
banks.  The  banks  were  examined  as  already  described,  with 
the  remarkable  result  that  they  all  passed  the  examina- 
tion. We  now  know  that  at  least  a  year  should  have  been 
spent  in  coaching  many  of  these  banks  into  a  solvent  con- 
dition. But  the  proponents  of  bank  guaranty  were  far  too 
impatient  for  any  such  delay,  and  they  dared  not  antago- 
nize the  individualistic  tendencies  of  these  private  bankers 
by  an  unflinching  enforcement  of  the  law.  The  result  was 
that  many  of  these  territorial  banks  entered  the  guaranty 
system  with  their  solvency  in  doubt.  The  events  which 
followed  greatly  increased  the  harm  this  might  do.  Bank 
guaranty  was  already  in  politics,  but  it  was  now  to  sink 
deeper,  for  six  months  later  it  was  made  a  prominent  issue 
in  the  forthcoming  national  election.  This  had  an  unfor- 
tunate effect,  for  all  through  the  campaign  the  Oklahoma 
law  was  the  cynosure  of  the  nation.  It  will  be  remembered 
that  at  this  time  the  state  banking  board  consisted  of  the 
principal  state  officials  who  had  been  instrumental  in  enact- 
ing the  law.  This  board  felt  that  a  rigid  enforcement  of  the 
law  would  antagonize  the  banking  fraternity  and  make  the 
idea  unpopular  on  the  eve  of  the  national  election.  The 
campaign  also  unduly  advertised  the  law,  the  result  be- 
ing that  the  deposits  of  the  guaranteed  banks  more  than 
doubled  the  6rst  year.  In  this  way  the  demands  of  politics 
thwarted  the  strict  enforcement  of  the  law,  while  at  the 
same  time  the  law  was  greatly  expanding  the  deposits  of 
both  sound  and  unsound  banks,  thus  adding  fuel  for 
speculative  purposes. 

1  See  pages  37-40. 


102    THE  GUARANTY  OF  BANK  DEPOSITS 

It  is  worthy  of  note  that  since  the  enactment  of  the 
guaranty  law  not  one  national  bank  has  failed  in  Oklahoma 
that  has  occasioned  a  loss  to  depositors.  The  oil  plunging 
of  W.  L.  Norton  caused  an  embarrassment  to  the  Farmers' 
National  Bank  of  Tulsa  and  the  American  National  Bank 
of  Bartlesville  —  two  banks  in  which  he  was  personally 
interested.  The  Farmers'  Bank  was  forced  to  suspend,  but 
later  paid  out  dollar  for  dollar.  Norton  was  sentenced  to 
serve  seven  years  in  the  United  States  penitentiary  for 
making  false  records  in  the  books  of  the  American  National 
Bank  of  Bartlesville.1  On  October  31,  1919,  the  First 
National  Bank  of  Hobart,  Oklahoma,  was  closed,  but  there 
was  no  loss  to  depositors.  This  record  of  the  national 
banks  is  in  striking  contrast  to  that  of  the  state  banks  for 
a  period  after  the  enactment  of  the  guaranty  law.  The 
national  banks,  under  the  supervision  of  the  United  States 
Government,  were  saved  from  the  mire  of  Oklahoma  spec- 
ulation. The  state  banks,  corrupted  by  the  disease  of  po- 
litical expediency,  were  swept  off  their  feet  by  the  first 
adverse  wind. 

When  the  system  began  to  break  the  hesitating  policy  of 
the  state  banking  board  was  still  further  in  evidence.  The 
board,  feeling  the  political  necessity  of  making  the  scheme  a 
success,  resorted  to  all  sorts  of  means  to  bolster  up  the 
tottering  system.  The  law  was  plain.  The  duty  of  the  board 
was  strictly  to  enforce  the  law,  and,  should  a  failure  occur, 
take  charge  of  the  bank  and  pay  the  depositors.  Instead  of 
doing  this  the  board  tried  to  anticipate  failures  and  by  the 
use  of  the  guaranty  fund  to  tide  them  over.  In  some  cases 
it  took  money  from  the  guaranty  fund  and  made  deposits 
with  banks  in  a  failing  condition.  In  other  cases  it  used  the 
fund  to  buy  securities  from  failing  banks.  For  ten  months 
prior  to  the  failure  of  the  Planters'  and  Mechanics'  Bank  of 
Oklahoma  City  the  board  had  been  both  making  deposits 
with  and  buying  securities  from  it,  only  in  the  end  to  see  it 

1  The  sentence  was  commuted  to  a  year  and  a  day  for  good  behavior. 


THE  OKLAHOMA  SYSTEM  103 

go  under.1  The  money  thus  deposited  was  not  only  lost, 
but  the  whole  loss  of  the  subsequent  failure  had  also  even- 
tually to  be  met.  When  the  guaranty  fund  gave  out  the 
board  borrowed  money  by  means  of  the  sale  of  interest- 
bearing  warrants  for  the  purpose  of  continuing  this  ques- 
tionable policy.  The  excuse  of  the  board  was  that  this 
temporary  assistance  would  enable  the  bank  to  stem  the 
tide  and  thus  save  the  fund  the  much  greater  loss  incident 
to  the  closing  and  the  liquidation  of  the  bank.  But  almost 
without  exception  the  bank  had  ultimately  to  be  closed. 
This  policy  was  clearly  beyond  the  intention  of  the  law 
and  has  now  been  abandoned. 

This  account  of  the  Oklahoma  experiment  shows  that  it 
has  been  the  victim  of  the  combined  operation  of  many 
unfavorable  forces.  The  first  difficulty  in  the  way  of  suc- 
cess was  that  the  early  propagandists,  flouting  the  inexor- 
able laws  of  scientific  insurance,  tried  out  the  scheme  on 
banks,  many  of  which  emerged  from  the  territorial  regime 
in  an  unsound  condition.  The  insidious  working  of  politics 
prevented  these  unsound  banks  from  being  brought  into 
conformity  with  the  law  or  else  forced  out  of  business. 
The  guaranty  law  removed  the  necessity  of  the  depositor's 
giving  careful  scrutiny  to  the  strength  of  the  bank  that  he 
patronized,  with  the  result  that  the  deposits  of  the  unsound 
banks  grew  as  rapidly  as  those  of  the  sound  ones.  Okla- 
homa was  a  rapidly  developing  country  and  this  joined  to 
lax  banking  morals  ended  in  wild-cat  banking.  Serious  crop 
failures  put  a  damper  on  the  Oklahoma  boom  and  when  the 
reaction  set  in  many  of  these  speculative  banks  were  unable 
to  stem  the  tide.  These  various  forces,  acting  and  reacting 
on  one  another,  brought  the  Oklahoma  system  at  one  time 
to  the  very  threshold  of  destruction.  The  proponents  of 
bank  guaranty  could  scarcely  have  chosen  more  unfavor- 
able conditions  under  which  to  experiment  and  the  miracle 
is  that  the  breakdown  was  not  complete. 

1  Quarterly  Journal  of  Economics.  1913,  £8:80. 


104    THE  GUARANTY  OF  BANK  DEPOSITS 

In  September,  1914,  the  guaranty  fund  was  $807,475.09 
in  debt.  For  a  time  it  seemed  highly  improbable  that  the 
system  by  its  own  exertion  would  be  able  to  extricate  itself. 
Governor  Cruce  recommended  to  the  legislature  of  1913 
a  general  tax  levy  to  assist  in  wiping  out  the  indebtedness 
of  the  fund.  In  urging  such  action  he  said: 

The  purpose  of  the  enactment  of  the  law  was  first  to  make  se- 
cure to  the  individual  the  payment  of  his  deposit;  second,  and  in 
a  much  broader  sense,  it  was  to  enforce  stability  in  financial 
affairs  in  this  state.  While  the  man  who  places  his  money  in  the 
bank  is  primarily  protected  by  having  his  money  returned  to  him 
—  every  man  in  the  state  is  indirectly  benefited  by  having  a  con- 
dition prevail  in  financial  circles  that  will  prevent  a  tightening  of 
credits  and  permit  business  to  flow  in  uninterrupted  channels. 
The  benefit  that  the  banker  gets  is  in  this  larger  way,  for  bankers, 
like  all  business  men,  are  vitally  interested  in  the  stability  of  com- 
mercial conditions.  The  banker  also  profits  in  the  fact  that  greater 
confidence  has  been  inspired  among  the  depositors  in  his  institu- 
tion, thereby  increasing  the  amount  of  his  deposits;  but  since  the 
benefits  of  this  law  are  so  universally  distributed  and  so  far- 
reaching,  is  it  fair  that  all  the  burdens,  from  which  flow  these 
benefits,  should  rest  upon  a  single  class  of  individuals?  I  think 
not.  I  believe  that  this  burden  should,  in  a  measure,  be  borne  by 
the  general  public,  since  the  general  public  is  a  large  beneficiary  of 
the  law.  I  believe  that  a  tax  upon  the  average  daily  deposits  of 
banks  should  be  levied  each  year  and  that  the  amount  should  be 
fixed  and  certain,  so  that  the  banker  may  know  what  his  liabilities 
in  the  way  of  taxation  may  be.  This  fund  should  be  used  for  the 
purpose  of  liquidating  deposits  in  state  banks;  and  if  this  fixed 
tax  should  fail  in  the  future  to  be  sufficient  to  meet  the  payment 
of  deposits  of  failed  state  banks,  then  the  residue  should  be  borne 
by  the  state.  This  would  make  the  enforcement  of  the  criminal 
provisions  of  the  law  much  easier. 

Notwithstanding  the  influence  of  the  governor,  the  bank 
commissioner,  and  the  banks,  little  enthusiasm  was 
evinced  in  favor  of  any  state  assistance.  Almost  a  fourth 
of  the  total  vote  of  the  state  has  on  occasions  shown  social- 
istic tendencies  and  the  Jacksonian  suspicion  of  banks  and 
banking  operations  is  too  widespread  to  hope  for  any  relief 


THE  OKLAHOMA  SYSTEM  105 

from  a  general  tax  levy.  Seven  years  ago,  when  this  pro- 
posal of  a  general  tax  levy  was  being  seriously  considered, 
the  situation  was  at  its  most  gloomy  stage.  Since  then 
general  conditions  over  the  state  have  greatly  improved 
and  the  revamped  guaranty  system  and  the  general  bank- 
ing laws  have  had  time  to  work  out  far-reaching  reforms. 
At  the  present  time  the  guaranty  system  has  completely 
regained  its  feet  and  the  future  continues  to  grow  more 
hopeful. 

The  reconstruction  of  the  state  banking  department  has 
produced  most  salutary  results.  It  will  be  recalled  that  the 
state  banking  board  is  now  appointed  by  the  governor 
from  a  list  nominated  by  the  state  bankers  themselves. 
This  has  completely  divorced  the  board  from  politics.  Mr. 
J.  D.  Lankford,  who  served  as  bank  commissioner  from 
1911  to  1919,  organized  a  most  efficient  bank  supervision. 
This  department  is  indefatigable  in  ferreting  out  incom- 
petent and  reckless  banking.  The  state,  in  the  words  of 
the  bank  commissioner,  has  rapidly  emerged  "from  what 
would  be  termed  a  state  thoroughly  infested  with  financial 
criminals  and  incompetents,  with  lax  laws  and  but  little 
execution  of  same,  toward  leadership  in  all  that  is  clean, 
practical,  and  right  in  banking,  as  well  as  in  good  citizen- 
ship." l  General  economic  conditions  have  also  become 
quite  similar  to  those  of  older  states.  It  seems  fair  to 
assume  that  certain  events  of  pioneer  days  will  not  be 
repeated  —  at  least,  no  other  state  has  repeated  them. 
This  fundamental  change  in  conditions  in  conjunction  with 
the  rigid  and  watchful  supervision  of  banks  should  keep 
future  losses  within  a  reasonable  limit.  Finally,  the  most 
gratifying  feature  of  the  present  situation  is  the  condition 
of  the  guaranty  fund.  On  Septeml>er  30,  1914,  this  fund 
was  in  debt  to  the  amount  of  $807,475.09;  by  Deceml>er  31, 
1916,  this  had  been  reduced  to  8CGG.378.51;  while  on 
March  1,  19-20,  this  indebtedness  was  not  only  liquidated, 

1  F\fth  Biennial  Report  of  the  Bank  Commutioner,  letter  of  transmitlal. 


106    THE  GUARANTY  OF  BANK  DEPOSITS 

but  there  was  also  $75,000  in  the  treasury.  Another  assess- 
ment is  due  which  will  add  $275,000  to  this  amount,  and 
the  banking  board  holds  assets  conservatively  valued  at 
$50,000.  This  means  that  the  guaranty  fund  at  the  present 
time  amounts  to  about  $400,000.  It  is  patent,  therefore, 
that  the  year  1919  witnessed  the  lifting  of  the  pall  that 
settled  over  the  state  bankers  in  1909  to  1913.  It  has  been 
a  long,  hard  pull,  and  hardly  any  one  seven  years  ago  would 
have  said  that  it  could  be  done. 

Thirteen  years  ago  the  people  of  Oklahoma  rushed  cav- 
alierly into  bank  guaranty,  but  the  heartrending  events 
since  that  time  have  profoundly  sobered  them.  "  We  were 
right  in  principle"  is  the  universal  comment  in  the  state, 
but  the  average  citizen  "seems  hah*  ashamed  and  half 
amused "  when  he  reflects  on  the  incongruity  of  choosing 
the  Oklahoma  of  1907-12  as  the  laboratory  in  which  to 
perform  the  experiment.  Because  of  the  importance  of 
the  principle  involved,  and  because  of  the  dramatic  inci- 
dents attending  the  experiment,  this  episode  will  ever 
prove  an  absorbing  chapter  in  American  financial  history. 


CHAPTER  IV 

THE  KANSAS  SYSTEM 

1.  Conditions  antecedent  to  the  guaranty  law.  The  part 
taken  by  Kansas  in  the  early  movement  for  bank  guaranty 
has  already  been  touched  upon.  The  explanation  of  this 
early  agitation  in  Kansas  can  only  be  found  in  an  exami- 
nation of  the  conditions  through  which  that  state  was  then 
passing.  In  the  early  eighties  a  conjuncture  of  auspicious 
events  served  to  give  the  impetus  to  the  boom  which  swept 
over  that  and  neighboring  states.  This  boom  attained  its 
maximum  intensity  in  1886-87.  Then  came  a  long  series 
of  crop  failures  at  a  time  when  the  price  of  farm  products 
had  sunk  below  the  cost  of  production.  On  top  of  this 
affliction  came,  a  few  years  later,  more  lean  years  and  then 
the  trying  national  depression  of  1893.  In  the  face  of  this 
reversal  the  boom  collapsed  like  a  punctured  bubble  and 
for  years  Kansas  was  prostrate.  In  1891  Kansas  passed  a 
general  banking  law,  and  for  the  first  time  the  banks  of  that 
state  came  under  regulation.1  Prior  to  the  enactment  of  this 
law  the  banks  were  of  a  private  nature,  most  of  them  being 
in  the  form  of  real-estate  companies.  These  loan  companies 
had  become  deeply  involved  in  the  boom,  and  when  the 
days  of  adversity  came  they  found  themselves  loaded  down 
with  unprofitable  and  unsalable  real  estate  and  other  secu- 
rities. The  result  was  that  in  the  six-year  period  of  1892-98 
seventy-five  state  banks  suspended  in  Kansas.2  In  the 
decade  from  1890  to  1900  thirty-two  national  banks  failed 
in  the  state  with  a  net  loss  to  depositors  of  over  nine  hun- 
dred thousand  dollars.1 

This  protracted  i>eriod  of  depression  crystallized  the  Pop- 

1  Second  Biennial  Report  of  the  State  Rank  Commissioner,  p.  iii. 
*  Second,  Third,  and  Fourth  Biennial  Reports  of  the  State  Bank  Com- 
missioner. 

1  Report  of  the.  Comptroller  of  the  Currency,  1915.  vol.  u.  pp.  114-17. 


108    THE  GUARANTY  OF  BANK  DEPOSITS 

ulist  movement.  The  Populists  had  great  faith  in  the  effi- 
cacy of  legislation  in  moulding  economic  conditions  and 
they  made  bold  to  carry  their  convictions  into  effect.  To 
relieve  the  low  price  of  agricultural  products  they  called  for 
the  immediate  doubling  of  the  currency  of  the  country. 
To  them  the  railroads  were  a  monstrous  octopus  absorbing 
the  profits  of  the  farmer;  hence  they  demanded  govern- 
ment ownership  of  railroads.  It  is  but  natural,  therefore, 
that  when  one  hundred  and  seven  bank  suspensions  oc- 
curred, with  all  the  distress  and  hardship  which  they  en- 
tailed, there  should  be  agitation  for  remedial  legislation. 
Consequently  we  find  the  guaranty  of  bank  deposits  as  an 
embryonic  idea  taking  shape  in  the  minds  of  many  men  of 
that  period. 

Representative  F.  P.  Gillispie,  described  by  Charles 
Sessions  as  a  "  long- whiskered  but  keen-minded  Populist," 
introduced  in  1897  the  first  bank-guaranty  bill  in  Kansas.1 
John  W.  Breidenthal,  the  Populist  bank  commissioner,  in 
his  Report  of  1897-98,  said  in  urging  a  guaranty  law: 

For  years  I  have  looked  forward  to  a  time  when  the  state  could 
adopt  such  a  requirement  with  safety,  and  with  the  assurance 
that  its  adoption  would  prove  a  success.  I  have  not  heretofore 
recommended  the  creation  of  a  guaranty  fund  for  the  very  good 
reason  that  it  was  first  necessary  that  all  banks  doing  business  in 
the  state  should  have  a  general  house-cleaning,  that  all  bad  results 
of  the  boom  period  be  eliminated  and  all  impairment  of  capital  be 
made  good.2 

Mr.  Breidenthal  then  outlined  in  detail  the  provisions  of 
his  contemplated  guaranty  law.  In  the  election  of  1898 
the  entire  Populist  state  administration  was  defeated  by 
the  Republicans.  However,  before  relinquishing  control  to 
his  successor  Governor  Leedy  called  a  special  session  of  the 
legislature  in  a  last  desperate  effort  to  get  a  guaranty  law. 
A  bill  drafted  by  Bank  Commissioner  Breidenthal  was 

1  Topeka  Daily  Capital,  September  5,  1909. 

2  Fourth  Biennial  Report  of  the  Bank  Commissioner,  p.  xvii. 


THE  KANSAS  SYSTEM  109 

introduced  into  the  legislature.  The  bill  "required  state 
banks  to  donate  either  one  eighth  of  one  per  cent  of  depos- 
its to  a  guaranty  fund  or  turn  over  to  the  state  treasurer 
five  per  cent  of  their  deposits,  the  interest  on  which  was  to 
go  into  the  guaranty  fund."  l  This  is  the  bill,  previously 
referred  to,  that  passed  the  State  Senate,  but  lacked  four 
votes  of  passing  the  House  of  Representatives.  Mr.  Sessions 
says  that  the  opponents  of  the  bill  referred  to  it  as  "one 
more  crazy  notion  of  the  Pops,"  while  the  Populists  them- 
selves attributed  their  defeat  to  the  fact  that  they  were 
"ten  years  ahead  of  the  times."  2 

One  week  later  the  Populists  gave  way  to  the  Republi- 
cans and  Stanley,  the  new  governor,  in  the  course  of  his 
first  message  said: 

The  bank  commissioner  recommends  the  creation  of  a  guaranty 
fund  for  the  protection  of  bank  depositors.  No  one  thing  con- 
nected with  the  business  of  banking  would  be  more  desirable  than 
some  proposition  securing  the  safety  of  depositors.  The  plan  pro- 
posed is  new ;  it  may  be  practical.  I  recommend  it  to  your  careful 
consideration.1 

This  suggestion  met  no  response  in  the  legislature,  and 
since  the  governor  pressed  the  matter  no  farther,  bank  guar- 
anty gave  place  to  other  things.  In  the  meantime  Kansas 
was  beginning  to  experience  wonderful  prosperity.  Abun- 
dant harvests,  rising  prices  for  farm  products,  and  nation- 
wide prosperity  wrecked  the  Populist  movement.  The 
banks  were  also  sharing  in  the  good  times  and  failures  were 
almost  unknown.  Kef  ore  this  rising  tide  of  prosperity 
bank-guaranty  agitation  gradually  melted  away  and  for 
ten  years  was  forgotten. 

Soon  after  the  Oklahoma  law  was  passed  the  idea  began 
again  to  attract  attention  in  Kansas.  Some  of  the  smaller 
banks,  especially  those  in  the  southern  part  of  the  state 
near  the  Oklahoma  state  line,  began  to  importune  the  state 
administration  for  such  a  law,  as  they  feared  that  the  guar- 

1  Topfka  Daily  Capital,  September  .».  1009. 
1  Ibid..  »  Ibid.,  January  13,  1909. 


110    THE  GUARANTY  OF  BANK  DEPOSITS 

anteed  banks  of  Oklahoma  would  attract  Kansas  deposits. 
Some  of  the  Oklahoma  banks  were  advertising  over  the 
country,  and  even  in  foreign  countries,  that  their  deposits 
were  guaranteed  by  the  guaranty  fund.  The  presidential 
election  was  also  greatly  advertising  the  Oklahoma  system. 
This  caused  some  of  the  Kansas  banks  to  feel  that  the 
Oklahoma  law  placed  them  under  a  serious  handicap,  and 
they  began  to  agitate  for  a  similar  statute  in  Kansas. 

This  resulted  in  a  serious  attempt  to  enact  such  a  law. 
The  panic,  the  Oklahoma  example,  and  the  agitation  on  the 
part  of  some  of  the  banks,  caused  Governor  Hoch  to  call 
a  special  session  of  the  legislature  to  meet  January  16, 
1908,  to  consider  such  legislation.  Hoch  was  a  Republican, 
but  a  sincere  believer  in  bank  guaranty.  In  1905,  when  he 
first  took  office,  he  led  the  crusade  that  resulted  in  the 
Kansas  legislature  appropriating  money  to  establish  a 
state  oil  refinery  to  break  the  monopoly  of  the  Standard 
Oil  Company  in  that  state.  This  law  was  soon  after  de- 
clared unconstitutional  by  the  State  Supreme  Court.  It 
was  natural,  therefore,  that  Hoch  should  be  favorably  in- 
clined to  the  guaranty  idea  when  it  began  to  attract  public 
attention.  The  special  session  of  the  legislature  began  its 
work  and  the  Quincy  bill  was  brought  forward  as  embody- 
ing the  ideas  of  the  friends  of  bank  guaranty.  But  the 
national  banks  and  the  other  opponents  of  the  proposition 
developed  powerful  opposition  to  the  measure,  and  this 
opposition  under  the  leadership  of  B.  P.  Waggener,  of 
Atchison,  the  astute  attorney  for  the  Missouri  Pacific 
Railway  Company,  started  in  to  cripple  the  bill.  The  bill 
was  now  loaded  down  with  ridiculous  amendments,  such 
as  requiring  unlimited  liability  of  stockholders  of  guaran- 
teed banks,  until  the  friends  of  the  measure  moved  the 
suspension  of  its  further  consideration. 

To  appease  the  popular  demand  for  guaranty  legislation 
Waggener  now  brought  forward  a  remarkable  proposition. 
His  bill  permitted  any  person  who  was  so  inclined  to  organ- 


THE  KANSAS  SYSTEM  111 

ize  a  private  insurance  company  with  a  capitalization  of  a 
million  dollars  for  the  purpose  of  insuring  bank  deposits. 
Of  course  the  state  laws  already  permitted  the  organiza- 
tion of  such  a  company,  and  the  governor,  considering  this 
subterfuge  so  preposterous,  vetoed  the  bill,  saying  that  it 
was  better  to  wait  until  a  law  based  on  right  principles 
could  be  passed. 

This  legislative  fiasco  occurred  nearly  six  months  prior 
to  the  Denver  Convention.  In  the  meantime  political 
expediency  greatly  altered  the  local  situation  in  Kansas. 
The  Democratic  National  Convention  at  Denver  had 
adopted  a  bank-guaranty  plank,  thus  automatically  forc- 
ing the  Republican  national  organization  into  a  position  of 
opposition.  But  the  Kansas  Republicans  refused  to  sanc- 
tion the  position  taken  by  the  national  organization  on  this 
question.  When  the  Republican  State  Council  met  in 
Topeka,  in  July  of  1908,  Bristow  and  Stubbs  were  in  con- 
trol. Bristow  was  seeking  the  nomination  for  the  United 
States  Senate  at  the  forthcoming  primary  election,  and 
Stubbs  the  nomination  for  governor.  Both  of  these  gentle- 
men frankly  admitted  that  it  would  be  folly  for  the  Kansas 
Republicans  to  play  into  the  hands  of  the  Democrats  by 
giving  them  a  monopoly  on  such  a  popular  vote-getter. 
Consequently  under  their  leadership  the  Kansas  Republi- 
cans went  on  record  as  favoring  the  guaranty  of  bank  de- 
posits, and  pledged  the  enactment  of  such  a  law  if  they 
were  returned  to  power  at  the  Novemter  election.  Both 
parties,  therefore,  went  before  the  people  pledged  to  sup- 
port such  legislation. 

2.  The  laic  and  its  amendments.  At  the  November  election 
the  Republicans  were  successful,  and  the  new  legislature 
met  in  January,  1909.  Both  parties  having  been  pledged  to 
support  such  legislation  the  principal  interest  centered  in 
the  nature  of  the  law  which  would  be  enacted.  The  parti- 
san discussion  and  criticism  to  which  the  Oklahoma  law 


112    THE  GUARANTY  OF  BANK  DEPOSITS 

had  been  subjected  proved  instructive  to  the  Kansas  legis- 
lators and  they  adopted  a  law  which  was  a  radical  depar- 
ture from  the  basic  principles  of  the  Oklahoma  plan. 

In  the  first  place  the  system  is  voluntary.  Each  bank  is 
free  to  choose  its  own  course,  and  the  action  of  one  bank  is 
sufficient  to  set  the  plan  in  operation.  Such  a  plan  silences 
the  objection  raised  against  the  Oklahoma  system,  that 
honest  banks  are  required  to  help  pay  the  debts  of  the  dis- 
honest. The  second  distinguishing  feature  of  the  law  is 
that  it  makes  no  attempt  to  pay  depositors  at  once.  When 
a  bank  fails  the  bank  commissioner  issues  to  each  depositor 
a  certificate  of  indebtedness  bearing  six  per  cent  interest, 
and  as  soon  as  the  assets  of  the  failed  bank  are  realized 
upon  the  funds  so  obtained  are  applied  to  the  payment  of 
these  outstanding  certificates.  But  the  depositor  really 
gets  the  equivalent  of  cash,  for  these  six  per  cent  certifi- 
cates are  gilt-edged  securities  and  the  other  banks  are 
eager  to  cash  them  both  for  the  sake  of  the  certificates 
themselves  and  in  the  hope  of  attracting  a  new  depositor. 
But  the  fact  remains  that  the  guaranty  law  itself  makes  no 
promise  of  immediate  payment.  These  are  the  two  domi- 
nating characteristics  of  the  Kansas  plan,  and  they  are  of 
such  far-reaching  importance  as  to  place  bank  guaranty  in 
Kansas  on  an  entirely  different  basis  from  that  upon  which 
the  Oklahoma  system  rests. 

The  Kansas  law  permits  any  incorporated  state  bank 
having  a  paid-up  and  unimpaired  surplus  equal  to  ten  per 
cent  of  its  capital  stock  to  take  advantage  of  the  benefits  of 
the  depositors'  guaranty  fund.1  Each  bank,  before  it  be- 
comes subject  to  the  operation  of  the  law,  is  subjected  to  a 
rigid  examination.  If  this  examination  is  satisfactory  the 
bank  is  required  to  deposit  with  the  state  treasurer,  as  an 
evidence  of  good  faith,  an  amount  equal  to  $500  for  every 
$100,000  of  deposits,  less  its  capital  and  surplus.  This  de- 
posit may  be  in  the  form  of  cash,  or  national,  state,  or 
1  Kansas  Bank-Depositors'  Guaranty  Law,  section  1. 


THE  KANSAS  SYSTEM  113 

municipal  bonds.1  Upon  meeting  these  requirements  its 
assessments  begin,  and  the  bank  is  given  a  certificate  by 
the  bank  commissioner  stating  that  its  deposits  are  pro- 
tected by  the  guaranty  fund. 

Since  there  is  no  attempt  to  pay  depositors  at  once  the 
size  of  the  fund  which  is  created  needs  only  to  be  sufficient 
to  meet  ultimate  loss.  The  law  provides  that  the  annual 
assessment  levied  on  each  bank  shall  be  one  twentieth  of 
one  per  cent  of  average  deposits,  but  in  computing  the 
amount  of  these  deposits  the  bank  is  permitted  to  subtract 
the  amount  of  its  capital  and  surplus.2  This  last  provision 
is  held  out  as  an  inducement  to  the  accumulation  of  capital 
and  surplus.  However,  in  each  case  the  assessment  must 
be  at  least  $20.  This  annual  assessment  continues  until  the 
fund  reaches  $500,000,  after  which  it  is  discontinued  until 
the  fund  falls  below  that  amount.  In  the  event  of  the  fund 
becoming  depleted  the  bank  commissioner  levies  such  ad- 
ditional assessments  as  are  necessary,  but  in  any  one  year 
there  cannot  be  more  than  five  assessments  of  one  twenti- 
eth of  one  per  cent  of  deposits.  The  state  treasurer  holds 
this  fund  in  the  state  depository  banks  subject  to  the  order 
of  the  bank  commissioner.8 

In  case  of  insolvency  the  bank  commissioner  takes 
charge  of  the  bank  and  proceeds  to  liquidate  the  assets. 
As  soon  as  possible  he  issues  to  each  depositor  an  interest- 
bearing  certificate.  The  rate  of  interest  on  these  certifi- 
cates is  six  per  cent  unless  the  deposits  for  which  they  are 
issued  bore  interest  at  a  contract  rate,  in  which  case  the 
certificates  bear  interest  at  the  contract  rate.  As  soon  as 
the  assets  of  the  failed  bank  are  realized  upon  these  certifi- 
cates are  paid  off.  If  sufficient  is  not  realized  to  cancel  the 
certificates  the  bank  commissioner  certifies  to  the  state 
treasurer  the  balance  yet  due,  and  the  state  treasurer  then 
pays  this  balance  from  the  guaranty  fund.4 


Bank-Dfpositort'  Guaranty  Lair,  section  2. 
*  Ibid.,  section  3.  '  Ibid..  *  Ibid.,  section  4. 


114    THE  GUARANTY  OF  BANK  DEPOSITS 

The  law  being  voluntary  a  bank  is  permitted  to  withdraw 
from  the  guaranty  system  should  it  so  desire.  But  any  bank 
so  withdrawing  is  required  to  pay  its  quota  of  assessments 
that  are  made  to  pay  losses  from  bank  failures  occurring 
within  six  months  after  the  date  of  its  application  to  with- 
draw. When  the  retiring  bank  has  met  all  the  requirements 
of  the  law  the  state  treasurer  returns  to  it  the  deposit  of 
cash  or  bonds  held  by  him  as  an  evidence  of  its  good  faith.1 

When  the  guaranty  law  was  passed  in  1909  the  legisla- 
ture at  the  same  time  amended  the  general  banking  laws, 
making  more  stringent  regulations  to  guard  against  loose 
banking.  The  law  has  established  a  relationship  between 
deposits  and  capital  and  provides  that  the  deposits  of 
guaranteed  banks  shall  not  exceed  ten  times  their  paid-up 
capital.  If  a  bank  exceeds  this  limit  for  as  long  as  six 
months  its  charter  is  revoked.2  The  law  limits  the  rate  of 
interest  which  a  bank  may  pay  on  deposits  that  are  subject 
to  the  guaranty  law,  and  an  officer  who  promises  to  pay  a 
higher  rate  is  guilty  of  a  misdemeanor.3  Advertising  in 
such  a  way  as  to  imply  that  deposits  are  guaranteed  by  the 
State  of  Kansas,  or  advertising  which  implies  that  the 
bank  is  a  member  of  the  guaranty  system  when  it  is  not,  is 
a  misdemeanor.4  If  upon  examination  a  bank  is  found  to 
be  violating  the  law  it  is  given  thirty  days  in  which  to  com- 
ply with  the  statutes.  If  at  the  end  of  this  time  it  is  still 
out  of  harmony  with  the  law  it  loses  its  membership  in  the 
guaranty  system  and  forfeits  to  the  guaranty  fund  the 
cash  or  bonds  which  it  has  on  deposit  with  the  state  treas- 
urer.6 The  law  governing  the  residence  of  directors  and  the 
amount  of  stock  which  bank  officials  must  hold  was  also 
made  more  strict,  and  if  the  bank  commissioner  finds  a 
bank  official  who  is  incompetent,  reckless,  or  dishonest,  he 
must  order  the  bank  directors  to  remove  such  official.6 

1  Kansas  Bank-Depositors'  Guaranty  Law,  section  5. 

2  Ibid.,  section  14.  *  Ibid.,  section  7.  4  Ibid.. 

6  Ibid.,  section  11.  e  Kansas  Banking  Law,  section  59. 


THE  KANSAS  SYSTEM  115 

The  law  offers  no  incentive  to  a  mushroom  growth  of  new 
state  banks  that  seek  the  prestige  of  the  guaranty  system 
to  draw  deposits.  The  Oklahoma  law  was  defective  in  this 
respect,  with  the  result  that  the  state  for  a  time  was  bur- 
dened with  a  superfluity  of  struggling  banks.  In  Kansas  a 
bank  cannot  enter  the  guaranty  system  until  it  is  a  year 
old,  and  then  it  must  have  a  paid-up  and  unimpaired  sur- 
plus equal  to  ten  per  cent  of  its  capital  stock,  unless  there 
should  already  be  no  guaranteed  banks  in  the  same  town.1 

Since  the  passage  of  the  law  in  1909  two  important 
changes  have  been  found  necessary.  Originally  the  law 
restricted  the  deposits  that  were  subject  to  guaranty  to 
those  not  bearing  interest,  to  time  certificates  bearing  in- 
terest at  not  more  than  three  per  cent,  and  to  savings  ac- 
counts of  not  over  one  hundred  dollars  to  any  one  person. 
But  now  all  deposits  not  otherwise  guaranteed  are  per- 
mitted to  be  protected  by  the  fund.  The  second  change 
was  in  regard  to  the  rate  of  interest  which  might  be  paid 
on  guaranteed  deposits.  At  first  this  was  limited  to  three 
per  cent,  but  this  proved  to  be  too  great  a  handicap  on  the 
guaranteed  banks.  The  economic  needs  of  the  various 
parts  of  the  state  differ,  so  the  law  as  amended  allows  the 
bank  commissioner  to  fix  the  rate  which  may  be  paid. 
This  has  been  done  and  the  rate  now  ranges  from  three  to 
five  per  cent. 

The  Kansas  law  permitted  the  national  banks  of  the 
state  to  participate  in  the  benefits  of  the  system  provided 
they  met  the  requirements  of  the  state  law.  But  At- 
torney-General Wickersham  took  the  same  position  which 
Mr.  Bonaparte  had  taken  in  the  Oklahoma  case,  ruling 
that  a  national  bank  had  no  corporate  power  to  submit  to 
state  regulation  and  that  only  an  act  of  Congress  could 
confer  upon  it  such  power.  As  in  Oklahoma  this  decision 
was  bitterly  resented  by  the  national  banks,  for  they 
feared  the  competition  of  the  guaranteed  state  banks. 

Almost  immediately  after  this  ruling  of  the  Attorney- 

1  Kansas  Bank- Depositor*   Guaranty  Lav,  section  1. 


116    THE  GUARANTY  OF  BANK  DEPOSITS 

General  a  movement  was  started  by  the  national  banks  to 
form  a  private  bank-deposit  insurance  company  to  coun- 
teract the  influence  of  the  guaranty  law.  Mr.  Wickersham 
held  that  there  was  no  legal  objection  to  such  a  course,  so 
in  May,  1909,  the  Bankers'  Deposit  Guaranty  and  Surety 
Company  was  formed,  with  a  capital  of  $500,000,  and  hav- 
ing headquarters  at  Topeka.  The  stock  of  this  company 
was  to  be  held  by  officers  of  national  banks  of  the  state  and 
of  those  state  banks  that  did  not  enter  the  guaranty  sys- 
tem. The  company  was  to  issue  policies  to  each  member 
bank  insuring  its  depositors  against  loss  in  case  of  failure. 
No  banks  are  accepted  by  this  company  until  after  they 
have  been  a  going  concern  for  at  least  a  year.  Premium 
rates  were  fixed  at  fifty  cents  for  each  thousand  dollars  of 
deposits  up  to  the  amount  of  the  capital  and  surplus  of  the 
insuring  bank.  The  rate  above  this  amount  was  to  be  one 
dollar  for  each  thousand  dollars  of  deposits.1  This  com- 
pany attracted  wide  attention  at  the  time  and  was  hailed 
by  many  as  the  most  equitable  solution  to  the  problem  of 
protecting  deposits.  About  one  hundred  banks  became 
members  of  the  company.  Although  the  company  sus- 
tained no  losses  the  enthusiasm  of  the  movement  soon  died 
out.  After  ten  years  about  two  thirds  of  the  banks  that 
originally  protected  their  deposits  in  this  manner  are  con- 
tinuing their  insurance.  Of  the  banks  carrying  this  insur- 
ance about  one  out  of  four  are  state  banks.2  The  national 
banks  have  long  since  ceased  to  fear  any  special  competi- 
tion from  the  guaranteed  banks  with  the  result  that  few  of 
them  feel  the  need  of  this  insurance  as  an  advertising  fea- 
ture, and  many  that  insured  their  deposits  ten  years  ago 
have  permitted  their  policies  to  lapse.  The  company  is 
now  confining  its  activities  in  large  part  to  a  bonding  and 
allied  business. 
The  Kansas  law  also  got  into  the  courts.  The  Abilene 

1  Quarterly  Journal  of  Economics,  1909,  24 : 349. 
8  Letter  from  the  secretary  of  the  company. 


THE  KANSAS  SYSTEM  117 

National  Bank,  of  Abilene,  Kansas,  instigated  proceedings 
to  prevent  the  state  officials  from  enforcing  the  law,  the 
contention  being  that  it  was  unconstitutional.  Judge  J.  C. 
Pollock,  of  the  United  States  Circuit  Court,  upheld  this 
contention,  saying  that  the  law  violated  the  Fourteenth 
Amendment  to  the  Federal  Constitution  in  that  it  con- 
ferred special  privileges  upon  certain  classes.  The  case  was 
appealed,  and  on  May  20,  1910,  Judge  W.  C.  Hook,  of  the 
United  States  Circuit  Court  of  Appeals,  reversed  the  de- 
cision of  Judge  Pollock,  saying  that  there  was  no  merit  in 
the  contention  of  the  Abilene  Bank.  The  case  was  then 
appealed  to  the  United  States  Supreme  Court.  The  state 
banks  that  did  not  want  to  operate  under  the  law,  headed 
by  the  Assaria  State  Bank,  of  Assaria,  Kansas,  asked  for  an 
injunction  to  restrain  the  state  officials  from  enforcing  the 
law.  They  claimed  that  they  did  not  want  to  participate  in 
the  guaranty  system,  but  that  while  the  law  was  voluntary 
in  letter  it  was  compulsory  in  spirit,  since  business  policy 
would  force  the  banks  into  the  system.  They  therefore 
maintained  that  the  enforcement  of  the  law  would  be  an 
unjust  discrimination  against  them.  Judge  Pollock  refused 
to  allow  the  contention  and  the  case  was  appealed  to  the 
United  States  Supreme  Court.  On  January  2,  1911,  this 
court  combined  these  two  Kansas  cases,  considered  them 
in  connection  with  the  Oklahoma  and  Nebraska  cases, 
which  were  also  before  the  court,  and  upheld  all  three  laws. 

3.  Bank  failures.  Since  the  law  went  into  operation  the 
guaranty  fund  has  sustained  three  losses.  Two  of  these 
failures  are  so  recent  that  at  the  time  this  is  being  written 
(May,  1920)  practically  no  information  is  available  except 
press  reports,  but  it  is  possible  that  when  the  losses  of  these 
banks  are  made  pood  the  guaranty  fund  will  be  in  lar^e 
part  or  wholly  wiped  out.  The  first  failure  was  that  of 
the  Abilene  State  Bank,  of  Abilene,  Kansas,  which  was 
wrecked  in  September,  1910,  through  the  emlx?zzlcments 


118    THE  GUARANTY  OF  BANK  DEPOSITS 

of  John  A.  Flack,  its  cashier.  The  guaranty  law  was  in  no 
way  responsible  for  this  failure.  The  bank  failed  for  no 
other  reason  than  the  flagrant  dishonesty  of  this  official  — 
a  type  of  dishonesty  that  has  manifested  itself  many  times 
in  the  past.  For  three  years  Flack  secretly  played  his 
game  —  now  niching,  now  boldly  robbing  —  running  the 
gantlet  of  all  known  ways  of  stealing  from  a  bank.  To 
keep  up  the  bank's  deposit  account  he  paid  six  per  cent 
interest  in  some  cases  to  hold  deposits,  paying  this  interest 
out  of  the  bank's  cash,  yet  leaving  no  records  for  the  direc- 
tors.1 To  get  money  he  forged  names.2  In  one  case  he  took 
$5000  from  the  bank  and  charged  it  to  his  own  account  by 
note,  yet  no  record  was  found  of  any  such  note.3  He  re- 
moved mortgages  from  safe-deposit  boxes  and  placed  them 
in  with  the  assets  of  the  bank.4  In  order  to  hide  his  trans- 
actions Flack  used  a  loose-leaf  ledger  and  kept  his  books 
in  balance  by  removing  leaves.  Flack  kept  one  of  the  most 
expensive  homes  in  Abilene  and  was  a  royal  entertainer. 
He  was  active  in  all  good  work  of  the  city,  and,  largely  be- 
cause of  a  personal  charm,  was  a  man  whom  every  one  de- 
lighted to  honor.  When  Flack  found  it  was  no  longer  possi- 
ble to  avoid  detection  he  fled  the  state  and  spent  two  years 
in  New  York  City  dodging  detectives.  After  being  at  lib- 
erty for  two  years  he  was  caught,  returned  to  the  state, 
tried,  convicted,  and  sentenced  to  the  state  penitentiary. 
I.  S.  Hallam,  the  president  of  the  bank,  collapsed  soon 
after  hearing  of  Flack's  absconding  and  died  a  few  days 
later.  Two  other  deaths  were  said  to  have  been  caused 
directly  by  the  wrecking  of  this  bank. 

As  soon  as  the  bank  closed  interest-bearing  certificates 
were  issued  to  depositors  as  provided  by  law.  The  other 
Abilene  banks  bought  up  these  certificates  at  once,  for  they 
were  eager  to  get  the  patronage  of  the  depositors  of  the  de- 
funct bank.  In  July,  1912,  there  were  $40,408.48  of  these 

1  Abilene  Weekly  Reflector,  September  15,  1910,  p.  1. 

2  Ibid..  3  Ibid..  *  Ibid.. 


THE  KANSAS  SYSTEM  119 

certificates  outstanding  and  assets  in  the  hands  of  the  re- 
ceiver amounting  to  $97,526.96. l  In  the  process  of  liquida- 
tion many  of  these  assets  proved  bad,  and  when  on  No- 
vember 22,  1913,  the  affairs  of  the  bank  were  finally  closed 
it  was  necessary  to  draw  on  the  guaranty  fund  to  the 
amount  of  $28,701. 76. 2 

The  second  failure  to  occur  in  Kansas  was  that  of  the 
Kansas  State  Bank,  of  Salina,  Kansas,  which  was  closed  in 
May,  1919.  It  is  probable  that  this  failure  will  cost  the 
guaranty  fund  from  a  quarter  to  a  half -million  dollars. 
This  bank  had  been  practically  insolvent  for  some  time, 
but  it  was  finally  wrecked  by  Felix  Broeker  and  H.  J. 
Lefferdink,  the  latter  the  bank's  cashier,  in  their  attempt 
to  purchase  a  New  Mexico  ranch. 

For  the  ranch  and  for  the  cattle  Lefferdink  and  Broeker  were  to 
pay  in  the  neighborhood  of  $400,000.  It  was  reported  that  investi- 
gators for  a  well-known  Kansas  trust  company  had  been  sent  to 
New  Mexico  to  appraise  the  ranch  and  that  its  report  was  as 
flattering  as  the  printed  prospectus  of  the  land  agents  had  made 
the  place  appear.  The  ranch  and  the  stock  and  the  "belongings" 
thereof  were  put  down  in  black  and  white  by  the  financial  experts 
as  being  worth  not  one  cent  less  than  $1,200,000.  The  purchase 
of  the  ranch  at  $400,000  was  accepted  as  a  bargain.  The  possibili- 
ties of  the  land  from  a  financial  standpoint  were  fairly  staggering. 
It  could  be  capitalized  at  a  million  dollars  and  bonded  at  one  half 
million  dollars.  The  sale  of  the  half-million  in  bonds  could  be 
used  to  pay  for  the  ranch,  with  $100,000  clear  for  the  promoters.3 

The  initial  payments  on  the  ranch  were  made  by  the 
issuance  and  sale  of  four  certificates  of  deposit  each  to  the 
amount  of  $25,000.  A  second  payment  amounting  to 
$125,000  was  made  by  Lefferdink,  the  cashier,  giving  his 
own  note  to  the  bank  and  using  this  amount  of  the  bank's 
funds.  It  was  expected  that  the  sale  of  the  bonds  issued  on 
the  ranch  would  furnish  funds  with  which  to  pay  the  cer- 

1  Eleventh  Biennial  Report  of  the  Bank  Commissioner,  p.  8. 
*  Twelfth  Biennial  Report  of  the  Bank  Commissioner,  p.  9. 
1  The  Katuai  City  Star,  October  «4.  1919,  p.  10. 


120    THE  GUARANTY  OF  BANK  DEPOSITS 

tificates  of  deposit  and  the  note  when  they  became  due. 
When  these  instruments  began  to  fall  due  no  funds  had  yet 
been  realized  on  the  sale  of  the  bonds,  and  Lefferdink,  in 
order  to  get  funds,  issued  twenty-five  sight  drafts  each  to 
the  amount  of  $5000.  About  this  time  the  bank  commis- 
sioner stepped  in  and  the  crash  came.  Lefferdink  escaped 
and  the  banking  department  was  left  to  straighten  out  the 
mess.  When  the  department  began  an  investigation  to  see 
how  far  the  ranch  would  protect  the  bank,  it  was  found  that 
the  cattle  on  the  ranch  had  been  driven  off  and  sold  to 
satisfy  a  mortgage  and  that  there  was  a  mortgage  against 
the  ranch  to  the  amount  of  $154,000,  which  was  reported 
to  be  about  fifty  per  cent  in  excess  of  the  value  of  the 
ranch.1 

The  amount  that  is  owed  the  bank  by  its  officers  and  men 
closely  associated  with  the  officers  is  $448,000.  Of  this 
amount  Felix  Broeker  is  charged  with  $146,784;  H.  J. 
Lefferdink,  $224,105,  of  which  amount  $60,000  is  an  over- 
draft; and  E.  J.  Guilbert,  the  president  of  the  bank, 
$42,392.  The  total  that  is  owed  the  bank  by  all  persons 
is  $595,000.2 

It  is  of  interest  to  examine  some  of  the  methods  this 
bank  used  in  collecting  deposits. 

One  Salina  business  man  was  offered  a  bonus  of  $5000  to  carry 
a  deposit  in  the  Kansas  State  Bank  for  120  days.  A  Claflin 
banker  made  two  deposits  of  $10,000  each  in  the  Salina  bank 
and  received  a  cash  bonus  of  $1000  on  each  deposit.3 

In  regard  to  these  methods  and  the  necessity  of  dealing 
with  them,  Governor  Allen  said: 

The  Salina  failure  has  presented  a  situation  not  foreseen  by  the 
state  legislature.  It  shows  the  absolute  necessity  of  statutory 
provisions  which  prohibit  the  campaign  for  funds  by  unscrupu- 
lous bankers.  When  a  bunch  of  crooked  speculators  get  control 
of  a  bank  and  offer  a  bonus  for  deposits  under  the  argument  that 

1  The  Kansas  City  Star,  October  24,  1919,  p.  10. 

2  Ibid.,  June  4,  1919.  3  Ibid.. 


THE  KANSAS  SYSTEM  121 

the  depositor  can  lose  nothing  since  the  bank  funds  are  guaran- 
teed, it  is  high  time  for  the  legislature  to  take  some  action. 

This  situation  has  proven  that  in  one  instance,  at  least,  the 
opponents  of  the  bank-guaranty  act  were  good  prophets.  Their 
argument  was  to  the  effect  that  unscrupulous  bankers  would  take 
advantage  of  the  fund.  That  is  just  the  thing  which  seems  to  have 
happened  at  Salina.1 

At  the  present  time  little  progress  has  been  made  in 
straightening  the  affairs  of  this  bank.  The  depositors  were 
given  interest-bearing  certificates  which  will  not  be  paid 
until  the  assets  are  liquidated.  The  Attorney-General  be- 
gan an  ambitious  programme  of  prosecuting  any  one  crim- 
inally liable,  but  to  date  he  has  had  little  success.  He  has 
complained  bitterly  that  the  citizens  of  Salina  have  given 
him  little  assistance.  The  reason  for  this  seems  to  be  that 
many  of  them  are  resentful  at  the  banking  department,  and 
the  further  fact  that  the  affairs  of  the  Salina  bank  touch 
the  business  life  of  so  many  Salina  people  that  they  do  not 
relish  the  advertising  incident  to  a  spectacular  trial.  The 
great  difficulty,  however,  is  that  Lefferdink  made  good  his 
escape  and  there  seems  to  be  a  tendency  on  the  part  of 
many  to  shield  themselves  by  unloading  the  guilt  on  to  him. 

The  third  loss  to  the  guaranty  fund  was  caused  by  the 
failure  of  the  Aulne  State  Bank,  Aulne,  Kansas.  This 
bank  was  closed  in  May,  1920.  V.  O.  Johnson,  the  bank's 
cashier,  confessed  to  the  embezzlement  of  $86,000  of  the 
bank's  funds.  Johnson  used  these  funds  to  develop  a  stock 
farm  on  which  he  maintained  a  large  herd  of  registered 
cattle  and  on  which  he  had  built  a  $20,000  home.  This 
project  failed  to  pay  l>ecause  of  the  break  in  prices  of  cattle 
and  the  high  cost  of  feed  and  farm  labor.2 

According  to  the  bank  commissioner  Johnson's  defalcations 
have  extended  over  a  period  of  four  years  and  were  very  similar 
to  those  utilized  when  the  Abilene  State  Bank  was  wrecked  more 
than  eight  years  ago.  ...  It  was  said  that  Johnson's  defalcations 
were  successfully  covered  up  by  the  use  of  Kxxso-leaf  lxx>kkeeping, 

1   The  Kanfdn  City  Star,  June  4,  1919. 

1  The  Weekly  Kantat  City  Star.  May  19,  19*0. 


122    THE  GUARANTY  OF  BANK  DEPOSITS 

and  that  the  cashier  personally  carried  time  deposits  instead  of 
placing  them  on  the  bank's  accounts.  According  to  the  statement 
Johnson  destroyed  ledger  sheets  and  juggled  certificates  of  de- 
posit records  in  order  to  cover  up  the  shortage.1 

Since  this  failure  occurred  but  a  few  days  before  this  is  being 
written  it  is  impossible  to  give  any  estimate  of  the  net  loss. 

Another  Kansas  bank  failure  that  is  of  interest  is  that  of 
the  Hanover  State  Bank,  of  Hanover,  Kansas.  This  bank 
was  also  closed  in  May,  1920.  The  Hanover  State  Bank 
was  not  operating  under  the  guaranty  law  and  for  that 
reason  the  failure  is  of  interest  principally  because  of  the 
manner  in  which  the  bank  was  wrecked.  August  Jaedicke, 
the  president  of  the  bank,  admitted  in  a  letter  to  the  bank- 
ing department  that  he  had  embezzled  $138,000  of  the 
bank's  funds.  In  addition  to  this  it  is  probable  that  he  has 
misappropriated  approximately  a  half-million  dollars  of 
the  funds  of  his  friends  and  neighbors  who  had  left  bonds 
and  other  securities  with  him.2 

This  makes  three  banks  in  Kansas  that  have  been 
wrecked  within  a  year  by  the  embezzlements  of  their  offi- 
cials. This  has  led  to  bitter  attacks  on  the  banking  de- 
partment, charging  it  with  gross  negligence  and  ineffi- 
ciency. However  this  may  be,  it  was  well  known  that  the 
Salina  bank  had  been  in  a  precarious  condition  for  years. 
This  bank,  operating  originally  under  another  name,  be- 
came in  such  a  condition  that  the  management  had  to  re- 
linquish control  and  the  bank  was  reorganized  by  other 
parties.  Certainly  in  this  case  at  least  there  was  sufficient 
warning  for  every  one,  including  the  banking  department, 
to  be  on  guard. 

4.  The  effects  of  the  law  on  the  state  and  the  national  banks. 
The  next  thing  of  interest  is  to  watch  the  effect  of  these 
failures  on  the  guaranty  system  of  the  state.  The  loss  to 
the  guaranty  fund  will  be  heavy,  and  it  remains  to  be  seen 

1  The  Weekly  Kansas  City  Star,  May  19, 1920.        2  Ibid.,  May  26,  1920. 


THE  KANSAS  SYSTEM  123 

what  effect  this  will  have  on  the  other  banks  and  on  the 
depositing  public.  Participation  in  the  system  being  vol- 
untary the  losses  may  cause  the  member  banks  to  forsake 
the  system,  while,  on  the  other  hand,  the  effect  on  the 
public  may  be  such  as  to  compel  practically  all  the  state 
banks  to  come  under  the  law.  In  Oklahoma  heavy  losses 
caused  the  larger  state  banks  to  defy  public  opinion  and 
nationalize;  in  Nebraska  bank  failures  caused  quite  a  num- 
ber of  national  banks  to  incorporate  under  the  state  laws 
and  guarantee  their  deposits.  Two  of  the  defunct  Kansas 
banks  have  been  closed  less  than  a  month  and  it  is  too 
early  to  determine  what  may  be  the  effect. 

The  law  went  into  operation  June  30,  1909,  and  at  once 
many  state  banks  began  to  avail  themselves  of  its  privi- 
leges. By  the  end  of  September,  1909,  300  banks  had  en- 
rolled and  were  protected  by  the  guaranty  fund.1  In  Sep- 
tember, 1912,  456  banks  were  operating  under  the  law, 
while  on  November  15,  1919,  there  were  649  guaranteed 
banks  and  443  unguaranteed.2  These  figures  show  that  the 
growth  of  the  guaranty  system,  while  steady,  has  not  been 
startling.  The  fact  that  only  a  little  over  half  of  the  banks 
are  operating  under  the  law,  at  a  time  when  the  assess- 
ments have  been  so  extremely  light,  shows  that  there  is  no 
great  public  interest  in  the  law.  It  is  significant,  however, 
that  the  total  deposits  of  the  guaranteed  banks  are  nearly 
two  and  one  half  times  those  of  the  unguaranteed.  On  the 
face  of  it  this  might  seem  to  indicate  that  the  law  has  had  a 
marvelous  power  over  deposits,  but  the  truer  explanation 
is  that  it  has  l>een  the  larger  banks  that  have  gone  into  the 
system.  Another  thing  which  goes  a  long  way  in  explaining 
the  small  total  deposits  of  the  unguaranteed  banks  is  the 
fact  that  under  the  law  a  bank  must  be  one  year  old  and 
have  a  paid-up  and  unimpaired  surplus  of  ten  per  cent  of 

1  Quarterly  Journal  of  Economic*.  1909,  24:354. 
1  Abstract  of  reports  of  the  condition  of  Kansas  banks,  November 
15,  1919. 


124    THE  GUAKANTY  OF  BANK  DEPOSITS 

its  capital  before  it  is  eligible  to  membership,  if  there  is  a 
guaranteed  bank  in  the  same  town  already.  The  number 
of  these  young  banks  is  quite  large,  and  while  they  help  to 
swell  the  total  number  of  unguaranteed  banks  they  have 
not  had  time  to  accumulate  large  deposit  accounts. 

However,  attempts  have  been  made  to  show  that  the 
guaranteed  banks  have  drawn  deposits.  In  November, 
1909,  Bank  Commissioner  Dolley  gave  out  the  following 
figures: l  On  June  30,  1909,  the  guaranteed  banks  had  on 
deposit  $52,000,000;  by  September  29,  1909,  they  had  in- 
creased to  $57,500,000,  or  a  gain  of  10.4  per  cent.  On  the 
same  dates  the  unguaranteed  banks  had  on  deposit  $36,- 
450,000  and  $39,500,000  respectively,  or  a  gain  of  only  8.5 
per  cent.  The  figures  for  June,  1913,  show  that  the  de- 
posits of  the  guaranteed  banks  were  seven  and  one  eighth 
times  their  capital,  while  the  deposits  of  the  unguaranteed 
banks  were  only  five  and  one  sixth  times  their  capital. 

The  fact  that  between  June  30  and  September  29,  1909, 
the  deposits  of  the  guaranteed  banks  increased  10.4  per 
cent  while  those  of  the  unguaranteed  increased  only  8.5 
per  cent,  was  undoubtedly  due,  in  part  at  least,  to  the 
guaranty  law.  But  this  was  the  first  three  months  of  the 
law's  operation,  and  it  is  natural  that  the  impression  on 
the  public  was  pronounced.  The  fact  that  on  any  particu- 
lar date  the  deposits  of  the  guaranteed  banks  were  seven 
and  one  eighth  times  their  capital,  while  those  of  the  un- 
guaranteed were  only  five  and  one  sixth,  is  wholly  mis- 
leading. It  has  already  been  pointed  out  that  as  a  rule  the 
guaranteed  banks  are  the  larger  banks.  The  small  banks 
are  the  typical  country  banks  and  in  these  banks  it  is  un- 
common to  see  the  deposits  exceed  four  times  the  capital 
stock.  On  the  other  hand,  the  deposits  of  the  city  banks 
are  usually  from  five  to  ten  times  their  capital.  Again,  the 
young  banks  are  automatically  debarred  from  the  system 
and  the  youth  of  these  banks  causes  their  ratio  of  deposits 
1  Chicago  Banker,  November  13,  1909,  p.  20. 


THE  KANSAS  SYSTEM 


125 


to  capital  to  be  abnormally  low.  This  distribution  of  banks 
must  be  taken  into  consideration  before  figures  as  to  the 
ratio  of  deposits  to  capital  are  interpreted  to  mean  any- 
thing. There  are  a  certain  number  of  people  who  undoubt- 
edly prefer  the  guaranteed  banks,  even  in  a  time  when 
failures  are  practically  unknown,  but  the  fact  that  little 
more  than  one  hah*  of  the  banks  feel  that  this  element  is 
worth  the  slight  cost  that  the  law  has  occasioned  up  to  the 
present  time  is  probably  the  best  indication  of  the  effect  of 
the  law  on  the  depositing  public.  But  public  feeling  is  a 
fickle  thing,  for  while  in  the  absence  of  bank  failures  the 
above-described  condition  might  exist  indefinitely,  a  series 
of  spectacular  failures,  such  as  the  state  has  just  experi- 
enced, may  greatly  change  the  situation. 

There  is  left  to  consider  what  effect  the  guaranty  law  has 
had  on  the  national  banks.  The  following  table  gives  the 
number  and  the  deposits  of  the  state  and  the  national 
banks.  The  figures  for  the  four  years  prior  to  1909  are 
given  in  order  to  show  the  normal  course  of  events  before 
the  enactment  of  the  law : 


r«cr 

Number  of 
itaie  bankt* 

Number  of 
not'  I  6an£«t 

DeporiU  of 
$taU  bankt  I 

Depontt  Q/ 
nai'l  bani-i  { 

1905  

558 

171 

$51,555,000 

$50,236,000 

1906  

628 

188 

62,343,000 

58,268,000 

1907  

701 

203 

71,773,000 

64,978,000 

1908  

747 

211 

76,716,000 

63,059,000 

1909  

777 

209 

93,121,000 

67,721,000 

1910  

843 

208 

102,667,000 

67,846,000 

1911  

869 

210 

96,255,000 

63,986,000 

1912  

896 

211 

102.128,000 

67,753.000 

1913  

908 

213 

113,743,000 

70.569,000 

1914  

9*7 

213 

107,960,000 

69,402,000 

1915  

936 

217 

118,692,000 

79,631,000 

1916  

987 

221 

165,620,000 

96,429,000 

1917  

1016 

230 

211,133,000 

126,081.000 

1918  

1054 

236 

249,788,000 

137,759,000 

Rifnniai  Report  of  llu  Bank  Commiitionfr.  p.  493.  and  ipeci*]  rrporti. 
t  Rrpori  of  tke  ComjXroUtr  of  Uu  Cumnct,  1918,  vol.  n.  p.  900. 
t  Itnd.,  Dote  1.  f  Itnd..  note  i 


126    THE  GUARANTY  OF  BANK  DEPOSITS 

These  figures  show  that  from  1905  to  1909  the  number  of 
national  banks  increased  22  per  cent,  while  their  deposits 
increased  33  per  cent ;  that  in  the  same  time  the  number  of 


;::::      Changes 
40-  

CHART  III. 
}  in  Number  of  Kansas  Ban! 

'  1  1  1  1  1  1  1  [  [  1  1  1  1  1  1  1  ii  1  1  [  1  1  1  1  1  1  1  [  |  '  1  [  1  1  1  1  1 

i               ill;  :  ,  .Iff* 

\m            !  |l  III     Ijjl 

CS     : 

f  M  '  i  J-M  1  F 

20-  +    '  •/ 
:::;;:  gfi  \ 

|f|    jil||jll| 
10-::::;-^:::::::::::: 

i   i 
iiii,iniii,iiiiii]iiiiiiiiiii|iiiii|iin 

i 

1905     1906    1907    1908    1909.    1310    1911    1912.   191&    1914    1915  1916 

. Number  of  State  Banks 

______  Number  of  National  Banks 

Percentage,  not  absolute  changes  are  plotted 


state  banks  increased  39  per  cent  and  their  deposits  86  per 
cent.  This  indicates  that  the  national  banks  were  enjoying 
a  healthy  growth,  although  not  developing  as  rapidly  as 
the  state  banks.  But  the  year  1909,  the  year  in  which  the 
guaranty  law  was  passed,  marks  a  change.  From  1908  to 
1910  there  were  96  new  state  banks  chartered,  and  the  de- 
posits of  the  state  banks  in  those  two  years  jumped  $25,- 
951,000.  In  the  same  time  the  number  of  national  banks 
decreased  by  three,  while  their  deposits  increased  only 


THE  KANSAS  SYSTEM 


127 


$4,662,000.  There  is  no  doubt  that  this  was  largely  due  to 
the  guaranty  law.  Bank  guaranty  was  a  new  experience 
and  the  bankers  for  a  time  greatly  overestimated  its  effect 


160- 


140- 


CHART  IV. 

Changes  In  Deposit*  of  Kansas  Bants 


1906   1906     1901    1908    1909    1910    1911     1912    1913    UtU     1916    1916 

_. ..Deposit!  of  State  Banks 

>  Deposit*  of  National  Banks 

Percentage,. not  absolute  changes  are  plotted 

on  the  depositing  public.  Consequently,  those  who  were 
contemplating  the  organization  of  a  bank,  being  uncertain 
as  to  the  effect  of  the  law,  avoided  the  national  system. 
Since  this  abnorm.il  two-year  period,  the  state  banks  have 
continued  to  develop  rapidly,  while  the  national  banks,  as 
regards  numbers,  have  little  more  than  held  their  own. 
But  to  explain  this  wholly  there  is  another  imiwrtant  factor 


128    THE  GUARANTY  OF  BANK  DEPOSITS 

which  must  be  considered.  We  refer  to  the  movement 
which  resulted  in  the  establishment  of  small  country  banks 
in  almost  every  little  village.  Small  towns,  which  twelve  or 
fifteen  years  ago  no  one  thought  of  as  having  a  bank,  now 
support  a  prosperous  little  institution.  These  country 
banks  have  sopped  up  many  of  the  rural  deposits  which 
before  went  to  the  large  city  depositories.  This  unexpected 
development  of  country  banks  is  probably  the  principal 
reason  for  the  slowing-down  of  the  growth  of  national- 
bank  deposits. 

It  is  patent  that  up  to  the  recent  failures  the  test  of  bank 
guaranty  in  Kansas  has  been  a  fair-weather  test.  The 
state  has  long  since  recovered  from  the  effects  of  its  over- 
development thirty  years  ago  and  has  reached  a  maturity 
and  stability  that  make  possible  a  reasonably  fair  test  of  a 
guaranty  law.  In  addition  to  this  the  state  has  enjoyed  its 
full  share  of  the  past  two  decades  of  general  good  times. 
Wealth  has  accumulated  and  values  have  been  greatly 
enhanced,  with  the  result  that  until  recently  bank  losses 
have  been  almost  unknown.  We  have  seen  that  in  the  past 
year  a  veritable  epidemic  of  bank  embezzlements  has 
passed  over  the  state.  Undoubtedly  these  embezzlements 
are  connected  with  the  rising  prices  that  have  marked  the 
past  few  years,  for  speculation  feeds  on  price  fluctuations 
and  the  indications  are  that  too  many  Kansas  bankers  have 
been  speculating  with  other  people's  money.  It  is  possible 
that  public  officials,  both  state  and  national,  charged  with 
the  supervision  .of  banks,  have  not  been  sufficiently  alert  to 
the  temptation  which  besets  bank  officials  to  speculate 
with  the  funds  at  their  disposal  when  prices  are  advancing 
rapidly. 

On  the  other  hand,  bank  failures  have  a  great  tendency 
to  multiply  in  a  period  of  depression.  What  would  happen, 
therefore,  should  conditions  like  those  of  1893  return? 
What  would  happen  in  the  event  of  a  worldwide  depression 
aggravated  by  a  persistent  recurrence  of  lean  harvests  in 


THE  KANSAS  SYSTEM  129 

Kansas?  Such  a  conjuncture  a  quarter  of  a  century  ago 
wrecked  more  banks  in  Kansas  than  have  failed  in  Okla- 
homa, and  such  a  thing  on  a  smaller  scale  might  happen 
again.  Such  a  catastrophe  might  so  burden  the  guaranteed 
banks  as  to  cause  them  to  quit  the  system  as  did  the  large 
state  banks  of  Oklahoma.  Kansas  might  then  awaken  to 
the  fact  that  her  voluntary  system  was  no  system  at  all. 
On  the  other  hand,  such  an  event  might  so  affect  the  de- 
positing public  as  to  force  practically  all  state  banks  under 
the  operation  of  the  law.  AH  this  is  pure  speculation,  but 
it  serves  to  show  that  the  full  test  of  the  Kansas  law  lies 
yet  in  the  future. 

Since  the  assessments  provided  by  the  Kansas  law  are 
very  light  the  guaranty  fund  did  not  grow  rapidly.  On 
September  13,  1916,  this  fund  amounted  to  $191,080.72. 
At  the  same  time  the  state  treasurer  held  $489,963.58  in 
bonds  and  cash  as  security  for  the  payment  of  future  as- 
sessments. By  October,  1918,  the  guaranty  fund  had 
reached  approximately  $500,000,  and  the  bonds  deposited 
to  guarantee  future  assessments  were  considerably  in  ex- 
cess of  this  amount.  The  Kansas  law  provides  that  when 
the  guaranty  fund  reaches  $500,000  the  assessments  shall 
cease  until  the  fund  becomes  depleted.  It  is  evident, 
therefore,  that  since  1918  the  banks  have  l)een  free  from 
assessments.  When  the  current  losses  are  finally  adjusted, 
however,  the  guaranty  fund  will  be  very  seriously  de- 
pleted, and  the  indications  are  that  the  banks  may  be  com- 
pelled to  rebuild  it  entirely. 

The  fact  that  this  fund  is  small  is  of  no  particular  conse- 
quence. Some  bankers  feel  that  it  would  be  better  to  dis- 
pense with  the  fund  altogether.  In  such  a  case,  when  a 
bank  failed  there  would  simply  be  an  assessment  on  the 
other  banks  sufficient  to  meet  the  loss.  This  would  have 
the  advantage  of  giving  the  banks  the  use  of  their  assess- 
ments until  they  were  needed,  but  it  would  l>c  a  disad- 
vantage in  that  the  inevitably  irregular  assessments  would 


130    THE  GUARANTY  OF  BANK  DEPOSITS 

prove  much  more  irritating  to  the  banks.  This  fund  is 
much  smaller  than  those  being  accumulated  in  most  of  the 
other  states,  but  since  it  is  drawn  upon  only  after  all  assets 
have  been  liquidated,  including  the  double  liability  of 
stockholders,  it  will  probably  be  sufficient  to  meet  losses 
which  may  reasonably  be  expected  to  occur. 


CHAPTER  V 
THE  NEBRASKA  SYSTEM 

1.  Conditions  antecedent  to  the  guaranty  law.  The  roots  of 
bank  guaranty  in  Nebraska  also  reach  back  into  Popu- 
list days.  As  in  other  granger  states  the  boom  fever  of  the 
eighties  was  followed  in  Nebraska  by  disaster  and  much 
suffering.  It  was  the  same  sequence  of  events  already  ob- 
served in  other  states  —  a  long  series  of  crop  failures,  gen- 
eral falling  prices,  and  the  long  depression  of  1893.  It 
was  these  events  which  crystallized  that  agricultural  dis- 
content known  as  the  Populist  movement.  In  the  period' 
from  1891  to  1896  Mr.  Dickinson  tells  us: l 

The  creditors  of  Nebraska  banks  had  over  five  million  dollars, 
tied  up  in  101  failed  banks,  of  which  sum  creditors  of  the  nationals 
finally  recovered  less  than  a  million,  and  creditors  of  state  banks 
an  unknown  sum,  perhaps  something  over  a  million.  .  .  .  The 
total  number  of  banks  in  Nebraska  fell  from  650  in  1892  to  587 
in  1896;  and  the  aggregate  deposits  declined  in  the  same-  time 
from  $48,9*0.000  to  $27,264,000. 

The  largest  failure  was  that  of  the  Capital  National,  in  Lincoln, 
whose  claims  amounted  to  81,300,000.  Only  about  $250,000  was 
finally  realized  from  its  assets.  The  distress  occasioned  by  this 
million-dollar  loss  to  depositors  was  a  tremendous  object-lesson 
to  the  members  of  the  legislature  of  1893,  which  was  then  in  ses- 
sion. Though  no  bill  was  introduced  into  the  legislature  for  de- 
posit guaranty  until  four  years  later,  apparently  it  began  to  be 
talked  of  at  that  time  as  a  practical  scheme.  C.  \V.  Mosher,  presi- 
dent of  the  Capital  National,  is  credited  with  having  written  an 
article  advocating  a  guaranty  plan  while  in  jail  awaiting  trial  for 
criminal  action  in  wrecking  his  bank. 

It  was  also  in  1893  that  W.  J.  Bryan,  then  representative  from 

1  Many  of  the  facts  given  in  this  chapter  regarding  the  historical  back- 
ground of  the  Nebraska  system  are  drawn  from  an  admirable  pamphlet  on 
bank-deposit  guaranty  in  Nebraska,  by  'L  Clark  Dickinson,  published  by 
the  University  oi.  Nebraska. 


132    THE  GUARANTY  OF  BANK  DEPOSITS 

the  First  District  of  Nebraska,  introduced  a  bill  into  the  House  * 
providing  for  the  payment  of  depositors  of  insolvent  national 
banks  by  an  insurance  fund  administered  by  the  Comptroller  of 
the  Currency.  His  action  was  inspired,  some  Nebraskans  say,* 
by  C.  O.  Whedon,  who  was  for  many  years  a  consistent  advocate 
of  national-bank  deposit  insurance.3 

According  to  Mr.  Dickinson,  thirty-six  banks  with  over 
a  million  dollars  of  deposits  failed  in  1896.4  This  loss  was 
probably  the  direct  cause  of  the  attempt  the  next  year  to 
enact  a  guaranty  law.  The  bankers,  however,  were  solidly 
against  the  measure  and  had  little  trouble  in  defeating  it. 
Two  years  later  another  attempt  was  made  to  enact  a 
guaranty  law,  but  again  it  met  defeat  at  the  hands  of  a 
powerful  banking  lobby.  Six  years  now  elapsed  before  an- 
other bill  was  introduced  into  the  legislature.  The  last  at- 
tempt was  made  in  1907,  but  ten  years  had  greatly  changed 
economic  conditions  in  the  state  and  guaranty  bills  now 
attracted  much  less  attention.  These  early  bank  failures 
made  a  powerful  impression  on  the  people  of  Nebraska  and 
it  required  only  the  panic  of  1907,  the  Oklahoma  example, 
and  the  attitude  of  the  Democratic  Party  in  the  election  of 
1908  to  cause  the  bank-guaranty  idea  to  spring  into  reality. 

In  the  early  fall  of  1908  the  state  Democratic  organiza- 
tion followed  the  example  of  the  national  platform  and 
pledged  itself  to  the  enactment  of  such  a  law.  Mr.  Shallen- 
berger,  the  Democratic  gubernatorial  nominee  on  this 
bank-guaranty  platform,  was  the  man  who  had  been  prin- 
cipally responsible  for  the  defeat  of  the  guaranty  bill  of 
1899.  An  attempt  was  made  on  the  part  of  some  of  the 
Republicans  to  put  the  Republican  state  organization  on 
record  in  favor  of  the  proposition  also.  As  we  have  seen, 
this  had  been  done  in  Kansas,  but  in  Nebraska  the  bankers 
were  exceptionally  well  represented  in  the  councils  of  the 

1  H.R.  3378,  Congressional  Record,  vol.  25. 

*  F.  A.  Harrison  and  W.  L.  Locke,  of  Lincoln. 

1  Dickinson,  Bank-Deposit  Guaranty  in  Nebraska,  pp.  10-11. 

«  Ibid.. 


THE  NEBRASKA  SYSTEM  133 

Republican  Party  and  the  attempt  to  commit  the  party  to 
bank  guaranty  was  unsuccessful.  The  issue  was,  therefore, 
sharply  drawn.  The  Democrats  triumphed  at  the  polls, 
but  by  the  time  the  legislature  met  in  1909  the  bank- 
guaranty  idea  had  begun  to  grow  cold,  and  the  personal 
influence  of  Mr.  Bryan  was  required  before  such  a  law 
could  be  passed. 

2.  The  law  and  its  amendments.  The  law  finally  enacted 
was  passed  March  25, 1909.  This  law  is  patterned  after  the 
Oklahoma  law  rather  than  that  of  Kansas.  The  law  is 
compulsory  for  all  state  banks.  It  provides  for  the  creation 
of  a  fund  equal  to  one  and  one  half  per  cent  of  deposits. 
When  the  fund  reaches  this  amount  the  assessments  cease; 
but  when  the  fund  becomes  depleted  below  one  per  cent  of 
deposits  the  assessments  are  resumed.  The  law  provides 
that  for  the  first  two  years  there  should  be  four  semian- 
nual assessments  of  one  fourth  of  one  per  cent  of  average 
daily  deposits,  and  after  that  semiannual  assessments  of 
one  twentieth  of  one  per  cent  of  average  daily  deposits.1 
Should  the  fund  fall  below  one  per  cent  of  average  deposits 
the  state  banking  board  must  levy  a  special  assessment, 
but  this  assessment  must  not  exceed  one  per  cent  of  average 
daily  deposits  in  any  one  year.1  The  banks  themselves  are 
allowed  the  custody  of  this  fund.  The  state  banking  board 
notifies  each  bank  of  the  amount  of  its  assessment,  and  the 
bank  then  sets  aside  this  amount  and  holds  it  payable  to 
the  board  on  demand. 

New  banks  organieed  after  the  law  took  effect  are  re- 
quired to  pay  four  per  cent  of  their  capital  to  the  fund 
when  they  open  for  business.  This  amount  is  subject  to 
adjustment  on  the  basis  of  average  daily  deposits  as  shown 
by  the  first  two  semiannual  assessments.  In  any  case  the 
first  two  semiannual  assessments  plus  the  four  per  cent  of 
capital  originally  contributed  must  equal  at  least  one  per 

1  Dige*  of  StaU  Bunking  Statute*,  p.  374.  '  Ilnd..  p.  375. 


134    THE  GUARANTY  OF  BANK  DEPOSITS 

cent  of  average  daily  deposits  as  shown  by  the  first  two 
semiannual  statements.1 

In  the  event  of  the  failure  of  a  bank  the  depositors  have 
priority  over  all  other  claims  except  those  of  taxes.  When 
such  a  bank  is  placed  in  the  hands  of  a  receiver  the  deposi- 
tors are  paid  out  of  the  available  cash.  If  this  cash  is  in- 
sufficient to  meet  all  claims  the  court  that  is  handling  the 
receivership  certifies  to  the  state  banking  board  the  amount 
of  the  deficiency,  and  the  board  then  determines  the  share 
of  each  bank  and  draws  sufficiently  on  it  to  make  up  the 
balance.2 

A  few  minor  amendments  to  the  law  have  been  made. 
The  first  act,  following  the  example  of  the  Kansas  law, 
provided  that  investments  of  a  bank  could  not  exceed  eight 
times  its  capital  and  surplus.  This  was  felt  to  be  too  great 
a  handicap  on  the  banks  and  the  law  was  relaxed,  making 
the  ratio  ten  instead  of  eight  times  capital  and  surplus. 
The  original  law  had  omitted  any  provision  regulating  the 
security  which  guaranteed  banks  were  required  to  give  for 
public  deposits.  In  1911  this  was  remedied  by  the  provi- 
sion that  banks  which  had  complied  with  the  law  should 
not  be  required  to  give  any  further  security  for  public 
deposits.3 

Several  features  of  this  law  are  worthy  of  special  notice. 
In  the  first  place,  it  makes  no  provision  for  the  issuance  of 
any  kind  of  an  interest-bearing  certificate.  The  system 
attempts  to  pay  depositors  as  soon  as  a  receivership  court 
can  close  the  affairs  of  the  failed  institution,  yet  it  is  ac- 
cumulating a  very  modest  fund  for  this  purpose.  It  is 
patent  that  in  the  event  of  a  serious  concentration  of  loss 
the  system  would  break  down.  Oklahoma  has  shown  the 
wisdom  of  having  the  bank  commissioner  close  the  affairs 
of  a  failed  bank  rather  than  by  the  method  of  the  old  re- 
ceivership process.  In  such  a  case  the  commissioner  often 

1  Digest  of  State  Banking  Statutes,  p.  375.  2  Ibid.,  p.  376. 

3  Quarterly  Journal  of  Economics,  1913,  28:100. 


THE  NEBRASKA  SYSTEM  135 

finds  it  advisable  to  pay  temporarily  the  large  majority  of 
the  depositors  from  the  guaranty  fund  in  order  that  he  may 
hold  the  assets  of  the  failed  bank  for  a  more  favorable 
market.  Of  course,  as  these  assets  are  realized  upon  the 
guaranty  fund  is  reimbursed.  But  this  method  necessitates 
a  larger  guaranty  fund  than  when  the  assets  are  hurriedly 
rushed  on  to  the  market.  In  the  event  of  heavy  losses  in 
Nebraska  the  fund  might  become  so  depleted  that  a  waste- 
ful sacrifice  of  assets  would  be  necessary  in  order  to  pay 
depositors  at  once.  The  sale  of  certificates  always  insures  a 
working  guaranty  fund,  while  it  disseminates  the  shock  of 
the  failure  by  permitting  the  banks  to  retire  these  certifi- 
cates at  their  leisure.  Certainly  such  a  scheme  is  preferable 
to  one  where  the  fund  is  maintained  by  onerous  special 
assessments  made  at  a  time  when  a  bank  most  of  all  needs 
to  conserve  its  strength. 

Almost  from  the  start  the  Nebraska  law  was  antago- 
nized by  the  banks,  both  state  and  national.  On  April  23, 
1909,  a  month  after  the  passage  of  the  law,  the  northern 
group  of  the  Nebraska  Bankers'  Association  passed  a  reso- 
lution voicing  their  disapproval  of  the  law  and  sanctioning 
actions  seeking  to  test  the  legality  of  the  measure.  A  suit 
was  soon  filed  by  John  L.  Webster  and  ex-Senator  W.  V. 
Allen,  representing  fifty-two  banks,  to  test  the  validity  of 
the  law.  The  contention  was  much  the  same  as  in  Okla- 
homa. The  Nebraska  law  had  required  all  private  banking 
concerns  to  incorporate  and  it  was  contended  that  this  was 
unconstitutional  in  that  it  prohibited  individuals  from 
engaging  in  the  banking  business.  It  was  also  contended 
that  the  fundamental  principle  underlying  the  law  was 
that  it  forced  banks  to  contribute  to  a  common  fund  to  pay 
the  losses  of  failed  banks  and  that  this  was  depriving  them 
of  property  without  due  process  of  law.  On  June  30,  1909, 
a  few  days  before  the  law  was  to  go  into  effect,  Circuit 
Judge  Willis  Van  Devanter  and  District  Judpe  Thomas  C. 
Munger  granted  a  temporary  injunction  restraining  the 


136    THE  GUARANTY  OF  BANK  DEPOSITS 

state  banking  board  from  putting  the  law  into  operation. 
Shortly  afterward  these  same  judges  decreed  that  the  law 
was  unconstitutional  and  made  the  injunction  perpetual. 
The  judges  recognized  that  the  law  prohibited  private 
parties  from  engaging  in  the  banking  business,  but  refused 
to  pass  upon  the  merits  of  this  point.  However,  on  the 
main  point  the  judges  held  that  the  law  appropriated  the 
assets  of  one  bank  to  meet  the  obligations  of  another;  that 
this  was  taking  the  property  of  one  person  without  com- 
pensation to  pay  the  debts  of  another,  a  thing  which  was 
expressly  prohibited  by  the  Fourteenth  Amendment  to  the 
Federal  Constitution.  The  case  was  appealed  to  the 
United  States  Supreme  Court,  and  on  January  2,  1911, 
that  court  advanced  the  Nebraska  case  and  considered  it 
with  the  Oklahoma  and  Kansas  cases  which  were  pending, 
and  handed  down  a  unanimous  decision  upholding  the 
constitutionality  of  all  three  laws.  Justice  Holmes  in  his 
opinion,  a  section  of  which  was  quoted  in  connection  with 
the  discussion  of  the  Oklahoma  law  in  a  preceding  chapter, 
overruled  the  decree  of  Justices  Van  Devanter  and  Munger 
and  dissolved  the  permanent  injunction  by  which  they  had 
restrained  the  state  banking  board  from  putting  the  Ne- 
braska law  into  operation.  On  January  3,  1911,  the  day 
after  his  opinion  was  overruled,  Justice  Van  Devanter  was 
sworn  in  as  an  Associate  Justice  of  the  United  States 
Supreme  Court. 

The  Nebraska  law,  which  had  been  in  the  courts  for 
nearly  two  years,  was  now  free  to  go  into  operation.  The 
Attorney-General  of  Nebraska  ruled  that  the  banks  would 
not  be  required  to  pay  the  assessments  while  the  law  was 
in  litigation  and  the  state  legislature  soon  after  amended 
the  law  by  omitting  such  assessments  and  provided  that 
assessments  should  begin  on  July  1,  1911. 

3.  Bank  failures.  Since  the  Nebraska  law  went  into  oper- 
ation three  bank  failures  have  occurred  occasioning  a  loss 


THE  NEBRASKA  SYSTEM  137 

to  the  guaranty  fund  of  approximately  $348,000.  When  the 
assets  of  these  banks  are  liquidated  a  considerable  part  of 
this  amount  will  be  returned  to  the  fund.  The  First  State 
Savings  Bank  of  Superior  and  the  Farmers'  State  Bank  of 
Decatur,  the  first  two  banks  to  fail,  have  each  paid  a  divi- 
dend of  about  fifty  per  cent.1 

About  the  same  time  two  national  banks  failed  hi  Ne- 
braska. The  First  National  Bank  of  Sutton,  with  deposits 
of  $185,918.31,  and  the  First  National  Bank  of  Superior, 
with  deposits  of  $235,495.73,  were  closed  November  5, 
1913,  and  January  12,  1914,  respectively.  It  required 
nearly  five  years  to  close  the  affairs  of  the  Sutton  Bank 
and  then  a  dividend  of  only  14.50  per  cent  was  paid  to 
depositors.  The  Superior  Bank  has  paid  a  dividend  of 
31  per  cent.2 

The  First  National  Bank  of  Superior  and  the  First  State 
Savings  Bank  of  Superior  failed  in  the  same  town  within 
three  months  of  each  other.  In  fact,  it  was  the  failure  of 
the  national  bank  that  pulled  down  the  state  bank.  The 
depositors  of  the  state  bank  were  paid  in  full  within  three 
weeks,8  while  the  depositors  of  the  national  bank  after  four 
years  have  received  only  thirty-one  cents  on  the  dollar  and 
with  the  prospects  of  never  receiving  more  than  this 
amount.4  The  public  was  not  slow  in  seeing  the  striking 
contrast,  and  every  national  bank  in  the  county,  taking 
the  hint,  renounced  its  national-bank  charter  and  incor- 
porated under  the  state  law.6 

4.  The  effeds  of  the  law  on  the  state  and  the  national 
banks.  Before  we  begin  a  more  detailed  examination  of  the 
effects  of  the  law  upon  the  banks  and  the  depositing  public, 
it  will  be  necessary  to  examine  the  relative  growth  of  the 

Letter  from  the  secretary  of  the  state  banking  board. 
Rfpori  of  the  Comptroller  of  the  Currency.  1918.  vol.  II,  p.  105. 
Quarterly  Journal  of  Economics,  1914,  29:193. 
Report  of  the  Comptroller  of  the  Currency,  1915,  vol.  II,  p.  107. 
Quarterly  Journal  of  Economic*,  1914,  29: 193. 


138    THE  GUARANTY  OF  BANK  DEPOSITS 

state  and  the  national  banks  in  a  period  before  the  guar- 
anty law  was  passed.  The  panic  of  1907  upset  the  normal 
growth  of  the  banks  in  the  two  years  immediately  preced- 
ing the  enactment  of  the  law,  but  if  we  take  the  three 
years  from  1904  to  1907  we  have  a  period  in  which  condi- 
tions were  normal  and  figures  trustworthy.  In  the  year 
1904-05  the  national  banks  of  Nebraska  gained  12  in  num- 
ber, or  8  per  cent,1  and  the  deposits  increased  $9,221,000, 
or  12  per  cent; 2  the  state  banks  gained  31  in  number,  or 
6  per  cent,  and  deposits  increased  $10,582,000,  or  nearly 
27  per  cent.3  In  the  year  1905-06  the  national  banks 
gained  20  in  number,  or  nearly  13  per  cent,  and  deposits 
increased  $8,187,000,  or  14  per  cent; 4  the  state  banks 
gained  38  in  number,  or  7  per  cent  and  deposits  increased 
$7,417,000,  or  15  per  cent.6  In  the  year  1906-07  the  na- 
tional banks  gained  17  in  number,  or  nearly  10  per  cent, 
and  deposits  increased  $8,933,000,  or  about  11  per  cent; 6 
the  state  banks  gained  37  in  number,  or  6  per  cent,  and 
$6,862,000  in  deposits,  or  12  per  cent.7  If  we  take  an  aver- 
age for  these  three  years,  we  find  the  following  relative 
growth: 

Increase  in  number     Increase  in  deposits 

National  banks 10     per  cent         14.6  per  cent 

State  banks 6.3  18 

This  shows  that  in  the  three  normal  years  before  the  days 
of  bank  guaranty  the  tendency  was  for  the  number  of  na- 
tional banks  to  increase  faster  proportionally  than  the  state 
banks,  but  for  the  deposits  of  the  state  banks  to  grow  faster 
than  those  of  the  national. 

We  have  seen  that  at  first  the  banks  were  bitterly  op- 
posed to  a  guaranty  law.   For  fifteen  years  after  the  year 

1  Report,  of  the  Comptroller  of  the  Currency,  1913,  p.  362.         *  Ibid.. 
Report  of  the  Secretary  of  the  State  Banking  Board,  1912,  p.  xvi. 
Report  of  the  Comptroller  of  the  Currency,  1913,  p.  362. 
Report  of  the  Secretary  of  the  State  Banking  Board,  1912,  p.  xvi. 
Report  of  the  Comptroller  of  the  Currency,  1913,  p.  362. 
Report  of  the  Secretary  of  the  State  Banking  Board,  1912,  p.  xvi. 


THE  NEBRASKA  SYSTEM  139 

1897  bank  failures  were  practically  unknown  in  Nebraska. 
This  remarkable  record  naturally  caused  the  public  to  lose 
interest  in  a  guaranty  law,  and  this  public  indifference 
encouraged  the  banks  in  their  opposition  to  the  law.  Con- 
sequently we  find  many  of  the  larger  state  banks  national- 
izing. In  1908,  the  year  the  guaranty  law  was  passed,  7 
state  banks  went  over  to  the  national  system; l  in  1909 
there  were  5,  with  a  total  capital  stock  of  $390,000; 2  in 

1910  there  were  8,  with  a  total  capital  of  $525,000; 8  and  in 

1911  11  joined  the  national  system  with  a  total  capital  of 
$420,000.*  The  fact  that  24  state  banks  nationalized  in  the 
first  three  years  after  the  passage  of  the  law,  and  in  a  period 
in  which  there  had  been  no  bank  failures  to  cause  a  loss, 
shows  that  many  of  the  banks  had  little  sympathy  with  the 
law  and  wanted  to  escape  the  rather  heavy  initial  assess- 
ments. 

But  while  the  guaranty  law  at  first  put  a  damper  on  the 
growth  of  the  state  banks  it  did  not  stop  the  growth.  On 
November  16,  1909,  there  were  662  state  banks,  with  de- 
posits amounting  to  $71,139,000;*  on  November  26,  1912. 
there  were  694,  with  deposits  amounting  to  $80,631,000.8 
Thus  in  this  period  the  number  of  state  banks  increased  a 
little  over  13  per  cent.  Comparing  these  figures  with  those 
for  the  rate  of  increase  of  the  state  banks  from  1904  to 
1907,  we  see  that  from  1909  to  1912  the  rate  of  increase  in 
number  fell  about  one  and  one  half  per  cent,  while  the  rate 
of  decrease  in  deposits  was  about  five  per  cent. 

In  1909  there  were  219  national  banks  in  Nebraska,  with 
deposits  amounting  to  $83,369,000.  By  1912  the  number 
had  increased  to  245,  with  $96,907,000  in  deposits,7  an 
increase  of  12  per  cent  in  number  and  16  per  cent  in  de- 
posits. The  figures  for  the  growth  of  the  national  banks 

1  Report  of  the  Secretary  of  the  State  Banking  Board,  1908,  p.  xix. 

1  Ibid.,  1909.  p.  19.  »  Ibid.,  1910.  p.  7. 

4  Ibid.,  1911,  p.  xviii.  •  Ibid.,  1909.  p.  ii. 

•  Ibid.,  191*.  p.  viii. 

1  Report  of  the  Comptroller  of  the  Currency,  1913,  p.  362. 


140    THE  GUARANTY  OF  BANK  DEPOSITS 

during  the  period  from  1904  to  1907  were  10  per  cent  gain 
in  number  and  14.6  per  cent  in  deposits. 

This  shows  that  the  growth  of  the  national  banks  from 
1909  to  1912  was  more  than  normal,  and  that  they  gained 
what  the  state  banks  lost.  If  we  compare  the  figures  for 
both  kinds  of  banks  in  this  three-year  period,  we  see  that 
the  state  banks  increased  five  per  cent  in  number  and  thir- 
teen per  cent  in  deposits,  while  the  national  banks  increased 
twelve  per  cent  in  number  and  sixteen  per  cent  in  deposits, 
which  figures  show  a  decided  contrast  to  those  for  the 
period  from  1904  to  1907.  These  figures  are  especially  in- 
teresting when  it  is  borne  in  mind  that  for  two  of  these 
three  years  the  law  was  not  in  actual  operation  because  of 
court  injunctions. 

The  year  1912  marks  a  turning-point  in  this  movement 
toward  bank  nationalization.  The  fact  that  no  state  banks 
nationalized  in  this  year  shows  that  the  antagonism  of  the 
banks  to  the  guaranty  law  is  dying  out.  At  first  the  banks 
opposed  the  law  because  they  believed  it  wrong  in  principle 
and  certain  to  prove  dangerous  in  practice.  But  five  years 
passed  without  a  failure  and  the  ones  that  have  occurred 
since  have  not  been  of  any  great  consequence.  Under  the 
Nebraska  law  the  banks  have  the  custody  of  the  guaranty 
fund.  Consequently  in  this  period  they  have  not  been  irri- 
tated by  having  to  make  excessive  payments  and  at  the 
same  time  they  have  had  the  use  of  their  share  of  the  fund. 
All  of  these  factors  working  together  have  tended  to  modify 
the  antagonism  of  the  banks. 

If  now  we  take  the  period  from  1911  to  1919,  the  eight 
years  in  which  the  law  has  been  in  actual  operation,  we  find 
convincing  proof  of  this  reaction.  On  August  31,  1911, 
there  were  662  state  banks,  with  deposits  amounting  to 
$75,590,000;  x  on  May  20,  1918,  there  were  910  state 
banks,  with  deposits  amounting  to  $231,506,000; 2  an  in- 

1  Report  of  the  Secretary  of  the  State  Banking  Board,  1911,  p.  ix. 

2  Report  of  the  Comptroller  of  the  Currency,  1918,  vol.  n,  pp.  785-89. 


THE  NEBRASKA  SYSTEM 


141 


crease  of  over  37  per  cent  in  number  and  over  306  per  cent 
in  deposits.  In  1911  there  were  246  national  banks,  with 
deposits  of  $90,473,000; l  by  1918  the  number  had  de- 


so-  ::::::•:::  ::::: 
•70-  :::::::::  ::::: 
60-  £::"f|:  "" 
60-  i:::::::::::::: 

CHART  V. 
Changes  in  Number 
of  Nebraska  Banks 

...|  —                    _..,± 

1 

40-  :~ 

»-  *nr±s  t::1 
t  i  ....  i 

»-  5r:::  jj  !:::: 

:i=|:: 

10-  ."yT,,  sIH 

iKI 

i 

J||||~       if 

/                                       ...._, 

II! 

i     i 

1905    1906     1907    1908     1909     1910    1911     1912    1918    19U    1916     1916 

t  Number  of  State  Bank* 

Number  of  Jiational  Bank* 

Percentage,  not  abaolut*  change*  are  plotted 

creased  to  191,  with  deposits  amounting  to  $148,275,000;  * 
an  actual  decrease  of  over  22  per  cent  in  number  and  an 
increase  of  nearly  64  per  cent  in  deposits. 

1  Report  of  the  Comptroller  of  the  Currency.  1918,  vol.  II,  p.  309. 
*  Ibid.. 


142    THE  GUARANTY  OF  BANK  DEPOSITS 

This  remarkable  shifting  of  banks  and  deposits  from  the 
national  to  the  state  system  indicates  clearly  that  the 
banks  have  become  reconciled  to  the  guaranty  law  and  are 


iso- 


CHART  VI. 
Changes  in  Deposits 
of  Nebraska  Banks 


140- 


120- 


80 


60 


40 


1905    1906    1907     1903    1909    1910    1911    1912  1913   .1914 

_____ —  Deposits  of  State  Banks 

-Deposits  of  National  BanRtt 
Percentage,  not  absolute  changes  are  plotted 

even  beginning  to  enter  into  it  enthusiastically.  It  has 
already  been  pointed  out  that  after  the  failure  of  two 
banks  in  Superior,  Nebraska,  —  one  a  state  and  the  other 
a  national  bank,  —  every  national  bank  in  the  county 


THE  NEBRASKA  SYSTEM  143 

changed  over  to  the  state  system.  It  has  been  suggested  ! 
that  the  dissatisfaction  of  the  national  banks  with  the 
Federal  Reserve  Act  has  been  a  potent  factor  in  the  large 
number  of  conversions  to  state  banks.  This  may  have 
played  a  part,  but  the  fact  remains  that  the  specter  of 
the  guaranty  law  did  not  deter  the  banks  in  making  the 
change.  The  figures  seem  to  show  also  that  the  law  is  popu- 
lar with  the  public  and  is  now  drawing  deposits.  On  De- 
cember 9,  1915,  the  total  deposits  of  the  state  banks  were 
$110,875,684.20,  of  which  amount  $47,934,460.27  repre- 
sented time  certificates  of  deposit.2  The  time  deposits  in 
the  national  banks  of  Nebraska  at  the  same  time  were  only 
$20,667,657.92,  or  much  less  than  half  those  of  the  state 
banks.'  The  guaranty  law  seems  to  be  the  only  explanation 
of  this  striking  contrast  —  an  explanation  generally  ad- 
mitted as  correct  by  the  national  bankers  of  the  state. 
The  secretary  of  the  state  banking  board  is  becoming 
alarmed  at  the  proportions  assumed  by  these  certificates  of 
deposit  on  the  books  of  the  state  banks.  He  thinks  that  a 
considerable  portion  of  these  funds  comes  from  banks  and 
bankers  outside  of  the  state,  and  that  in  the  event  of  a  crisis 
these  banks  would  be  compelled  to  lift  their  deposits  very 
suddenly,  thus  seriously  embarrassing  the  Nebraska  banks. 
However,  it  is  evident  that  the  Nebraska  law  has  as  yet 
been  given  no  real  test.  So  far  the  law  has  cost  the  banks 
very  little,  and  since  it  brings  them  business  it  is  natural 
that  they  should  be  favorably  inclined  to  it.  But  that  test 
will  come  or  the  history  of  the  past  teaches  nothing.  Mod- 
erate losses  would  probably  be  made  good  cheerfully,  but 
should  losses  necessitate  such  heavy  special  assessments  as 
to  consume  annual  dividends  for  a  series  of  years  the  atti- 
tude of  the  banks  might  greatly  change  as  the  Oklahoma 
incident  well  shows. 

1  Quarterly  Journal  of  Economien,  1914.  29: 194. 

*  Report  of  the  Secretary  of  the  Stale  Banking  Board,  1915,  p.  ix. 

1  Report  of  the  Comptroller  of  the  Currency.  1913,  vol.  11,  p.  106. 


144    THE  GUARANTY  OF  BANK  DEPOSITS 

On  December  5,  1911,  after  six  months  of  the  operation 
of  the  law,  the  depositors'  guaranty  fund  amounted  to 
$176,645.64.1  One  year  later  it  was  $573,375.34,2  while  on 
March  1, 1920,  it  was  approximately  $2,500,000.3  This  fund 
should  meet  any  ordinary  loss,  but  should  a  serious  break- 
down occur  a  hurried  amendment  to  the  law  might  be 
necessary,  for  the  plan  attempts  to  pay  depositors  at  once, 
yet  makes  no  provision  for  the  issuance  of  certificates  of 
indebtedness  by  which  either  temporarily  to  satisfy  deposi- 
tors or  to  borrow  money  with  which  to  pay  them.  The 
Oklahoma  experience  shows  that  the  banks  cannot  reason- 
ably raise  a  fund  sufficient  in  itself  to  meet  all  immediate 
losses.  As  the  law  is  now  constituted  its  success  will  de- 
pend, therefore,  largely  on  the  ability  of  the  state  banking 
board  to  prevent  a  concentration  of  loss.  If  failures  are  so 
distributed  as  to  allow  the  fund  to  recoup  itself  in  the 
meantime,  all  will  be  well. 

1  Report  of  the  Secretary  of  the  State  Banking  Board,  1911,  p.  xiii. 

*  Ibid.,  1912,  p.  xiii. 

*  Letter  from  the  secretary  of  the  state  banking  board. 


CHAPTER  VI 
THE  TEXAS  SYSTEM 

1.  Conditions  antecedent  to  the  guaranty  law.  Certain  unique 
features  of  Texas  banking  history  must  be  stated  in  or- 
der to  understand  fully  the  development  of  bank  guar- 
anty in  that  state.  A  distrust  of  financial  institutions  has 
marked  American  history  from  the  time  of  the  first  United 
States  Bank  to  the  recent  excitement  over  the  so-called 
"money  trust."  Texas,  sharing  this  common  distrust,  car- 
ried her  crusade  against  banks  to  an  extreme.  On  Febru- 
ary 5,  1844,  an  act  passed  by  the  Congress  of  the  Republic 
of  Texas  was  approved,  providing  "that  all  laws,  granting 
to  any  individual,  individuals  or  corporations,  the  author- 
ity to  issue  either  bills  or  promissory  notes,  to  pass  and 
circulate  as  money,  is  hereby  repealed,  and  the  authority  to 
issue  either  bills  or  promissory  notes,  or  any  other  instru- 
ment in  writing,  in  print,  hieroglyphics  or  engraving,  to  cir- 
culate as  money,  is  hereby  abridged."  l  Article  VII,  Sec- 
tion 30,  of  the  constitution  of  1845,  provided  that  "no 
corporate  body  shall  hereafter  be  created,  renewed,  or 
extended  with  banking  or  discounting  privileges."  2 

These  prohibitions  of  banking  institutions  show  how 
Jacksonian  Democracy  had  gripped  that  state.  The  senti- 
ment of  that  day  was  well  expressed  by  Mr.  Rush,  the 
president  of  the  convention  that  framed  the  constitution  of 
184o.  He  said: 

I  think,  as  a  member  of  the  convention  and  the  community, 
that  it  is  due  to  myself,  the  country,  and  the  people  themselves, 
to  restrain  them  from  doing  anything  which  would  result  in  their 
injury.  The  gentleman  from  San  Patricio  says  that  many  indi- 

1  Txitr*  of  Tartu,  vol.  II,  p.  1031. 

1  Uoute  Document*,  vol.  91,  part  II.  p.  336*. 


146    THE  GUARANTY  OF  BANK  DEPOSITS 

viduals  have  been  benefited  by  banks.  Thousands  upon  thousands, 
sir,  have  been  ruined  by  them.  I  consider  it  a  bright  page  in  the 
history  of  General  Jackson,  that  he  had  the  honor  of  giving  the 
blow  which  will  eventually  destroy  them  upon  this  continent. 
And  I  wish  by  no  vote  of  mine,  here  or  elsewhere,  to  authorize  the 
institution  of  a  bank,  which  may  benefit  a  few  individuals,  but 
will  carry,  here  as  elsewhere,  ruin,  want,  misery,  and  degradation 
in  its  train.1 

This  sentiment  held  the  people  of  Texas  in  such  a  spell 
that  it  was  only  in  1904  that  their  constitution  was 
amended  so  as  to  permit  state  banks.  In  1869  Texas,  act- 
ing under  the  authority  of  the  reconstruction  acts,  adopted 
a  new  constitution.  This  constitution  omitted  the  section 
of  the  constitution  of  1845  prohibiting  banking  institutions 
—  there  was  no  direct  sanction,  the  prohibition  being  simply 
omitted.  When  the  state  was  again  admitted  to  the  Union 
and  the  Democrats  had  returned  to  power  the  constitution 
of  1876  was  promptly  adopted.  This  constitution  rein- 
stated the  banking  prohibition  of  the  constitution  of  1845. 
Between  1869  and  1876,  the  constitution  being  silent  on  the 
subject,  the  legislature  by  special  acts  had  granted  charters 
to  some  eighteen  banking  institutions.2  Thus  prior  to  1904 
the  national  banks  constituted  the  banking  system  of 
Texas. 

It  has  already  been  noted  in  connection  with  the  Kansas 
and  Nebraska  laws  that  widespread  bank  failures  in  the 
early  nineties  were  the  cause  of  the  early  bank-guaranty 
agitation  in  those  states.  Texas  had  prohibited  state  banks, 
and  consequently  there  was  not  a  lot  of  small,  weak,  and 
ill-regulated  state  banks  to  fail  when  the  crisis  of  1893 
swept  over  the  state.  However,  Texas  did  not  escape  the 
curse  of  bank  failures,  for  between  1887  and  1909  thirty- 
two  national  banks  failed  in  that  state  with  losses  to  de- 
positors of  over  $1,175,000.3  We  know  also  that  bank  guar- 

1  Journals  and  Debates,  Texas  Constitution,  1845,  p.  461. 
3  Records  in  office  of  secretary  of  state,  Austin,  Texas. 
8  Report  of  Comptroller  of  Currency,  1915,  vol.  n,  p.  129. 


THE  TEXAS  SYSTEM  147 

anty  was  being  discussed  in  Texas  in  this  period,  for  at  the 
fifth  annual  meeting  of  the  Texas  Bankers'  Association 
held  at  Dallas,  May  8,  1889,  M.  E.  Longcape  read  a  paper 
in  which  he  outlined  a  scheme  for  guaranteeing  deposits.1 
But,  since  the  state  had  no  jurisdiction  over  the  national 
banks,  there  was  no  occasion  for  any  attempt  at  guaranty 
legislation. 

In  August  of  1908  the  Texas  state  Democratic  organiza- 
tion, in  harmony  with  the  national  Democratic  platform, 
pledged  the  party  to  bank-guaranty  legislation.  In  his 
message  to  the  legislature  of  1909  Governor  Campbell  called 
its  attention  to  the  pledge  in  both  the  state  and  national 
platforms.  When  the  legislature  met,  however,  it  was 
found  that  the  politicians  of  Texas,  like  those  of  other 
states,  had  played  politics  with  the  guaranty  idea.  There 
now  ensued  four  long  months  of  wrangling  on  the  subject. 
Powerful  opposition  had  in  the  meantime  developed  on  the 
part  of  the  national  banks.  These  banks  argued  that  Texas 
in  prohibiting  state  banks  before  1904  had  compelled  all 
banks  to  become  national  banks.  These  banks  now  con- 
tended that  the  state  had  no  moral  right,  after  forcing  them 
into  a  position,  to  turn  around  and  pass  a  guaranty  law 
which  would  give  the  new  state  banks  an  unfair  advantage. 
This  opposition  was  so  strong  that  the  regular  1909  session 
of  the  legislature  adjourned  without  passing  a  guaranty 
law. 

The  day  following  this  adjournment  the  governor  recon- 
vened the  legislature  for  the  purpose  of  considering  guar- 
anty legislation.  On  April  5,  1909,  Mr.  Bryan  addressed 
the  legislature  and  spoke  concerning  the  sanctity  of  plat- 
form pledges  and  closed  with  a  strong  plea  for  bank  guar- 
anty.1 A  serious  attempt  was  now  made  to  pass  such  a  law, 
but  the  legislature  soon  became  hopelessly  divided.  One 
wing  wanted  a  pure  and  simple  guaranty  law,  while  the  other 

»  The  Dallas  .Vrtr».  March  14,  1909. 
*  Ibid.,  April  6,  1909. 


148    THE  GUARANTY  OF  BANK  DEPOSITS 

wanted  a  plan  by  which  each  bank  would  furnish  security  of 
some  kind  to  protect  its  own  deposits.  Neither  side  was 
disposed  to  yield  and  the  legislature  finding  itself  hope- 
lessly deadlocked  again  adjourned. 

The  governor  now  promptly  called  a  second  extra  session 
and  at  the  same  time  severely  reprimanded  the  legislature 
for  its  failure  to  fulfill  platform  pledges.  He  characterized 
some  of  then*  substitute  bills  as  "a  sham  and  a  fraud,"  and 
added  that  "the  most  infamous  lobby  that  ever  trampled 
upon  the  will  of  the  people  has  swarmed  about  the  capitol 
from  the  beginning  of  your  regular  session  until  this 
hour."  l  The  same  conflict  developed  in  this  second  extra 
session,  but  after  another  month  of  wrangling  a  compro- 
mise was  effected.  A  law  was  finally  passed  in  which  the 
two  rival  schemes  were  agglutinated,  leaving  with  each 
bank  the  option  of  which  method  it  would  use. 

2.  The  Texas  law.  Texas  has,  therefore,  created  a  dual 
system.  Interest-bearing  deposits  and  deposits  otherwise 
secured  are  not  protected  by  the  law.  But  all  other  depos- 
its must  be  protected  by  one  of  two  methods,  the  plan  to  be 
used  in  each  case  being  left  to  the  choice  of  the  bank. 
These  two  methods  are  known  as  the  "  Depositors'  Guar- 
anty Fund"  and  the  "Depositors'  Bond  Security  System." 
They  are  entirely  distinct,  but  all  corporations  with  bank- 
ing and  discount  privileges  and  all  banks  and  trust  com- 
panies must  protect  their  deposits  subject  to  check  in  one 
of  the  two  ways. 

All  banks  and  trust  companies  that  elect  to  use  the  "De- 
positors' Guaranty  Fund  "  are  required  to  pay  to  the  state 
banking  board  one  per  cent  of  their  average  checking 
deposits  for  the  preceding  year.  Annually  after  this  first 
payment  the  assessment  is  one  fourth  of  one  per  cent  of 
average  checking  deposits  as  shown  for  the  preceding  year. 
This  assessment  continues  yearly  until  the  fund  reaches 
1  The  Dallas  News,  April  12,  1909. 


THE  TEXAS  SYSTEM  149 

$2,000,000  when  payments  cease  until  the  fund  becomes 
depleted.  When  the  fund  becomes  depleted,  or  when  an 
emergency  arises,  the  state  banking  board  may  require 
emergency  assessments,  but  such  assessments  can  never 
amount  to  more  than  two  per  cent  of  average  checking  de- 
posits in  any  one  year.  Twenty-five  per  cent  of  each  assess- 
ment is  paid  to  the  state  banking  board  and  the  board  in 
turn  deposits  it  with  the  state  treasurer.  The  remaining 
seventy-five  per  cent  is  credited  on  the  books  of  the  bank 
making  the  payment  to  the  state  banking  board.1  No  pro- 
vision is  made  for  the  issuance  of  interest-bearing  certifi- 
cates. 

All  new  banks  or  trust  companies  that  are  admitted  are 
required  to  pay  three  per  cent  of  their  capital  and  surplus 
into  the  fund,  but  this  amount  is  subject  to  adjustment  at 
the  end  of  the  year  on  the  basis  of  their  average  deposits. 
Only  banks  and  trust  companies  that  are  solvent  and  prop- 
erly managed  are  admitted  to  the  benefits  of  the  fund,  and 
the  state  banking  board  is  the  sole  judge  of  these  require- 
ments.2 National  banks  may  also  participate  in  the  law, 
but  the  opinions  of  the  Attorney-General  in  the  Oklahoma 
and  Kansas  cases  have  made  this  provision  inoperative. 

In  the  event  of  the  failure  of  a  bank  that  has  adopted 
this  plan  the  depositors  are  paid  at  once  out  of  the  cash 
that  can  be  made  available.  If  this  cash  is  not  sufficient 
the  guaranty  fund  is  drawn  upon  for  the  remainder.  When 
a  bank  is  being  liquidated  the  state  has  a  first  lien  upon  the 
assets  for  the  benefit  of  the  guaranty  fund.8 

Banks  that  elect  to  protect  their  depositors  by  means  of 
the  "Depositors'  Bond  Security  System"  are  required  to 
file  with  the  bank  commissioner,  on  the  first  day  of  each 
year,  "on  behalf  of  the  depositors  of  the  bank,  a  bond, 
policy  of  insurance,  or  other  guaranty  of  indemnity  in  an 
amount  equal  to  the  amount  of  its  capital  stock,  which 

1  Digr.fi  of  State  Banking  Statute*,  pp. 
•  Ibid.,  p.  645.  »  Ibid.. 


150    THE  GUARANTY  OF  BANK  DEPOSITS 

bond  or  policy  inures  to  the  benefit  of  the  depositors."  l 
The  bank  commissioner  is  the  sole  judge  of  the  worth  of  the 
security  offered  and  may  accept  or  reject  it  as  he  sees  fit. 

When  a  bank  whose  deposits  are  so  secured  fails,  the 
bank  commissioner  takes  charge  and  proceeds  to  liquidate. 
He  notifies  the  persons  obligated  in  the  bond,  policy,  or 
guaranty  of  indemnity,  and  sixty  days  after  this  notice 
these  instruments  become  payable.2  If  a  Texas  corpora- 
tion is  obligated  in  the  bond  and  refuses  payment,  its  char- 
ter is  forfeited;  if  a  foreign  corporation  is  obligated  and 
refuses  payment,  it  is  prohibited  from  transacting  business 
in  Texas.  If  after  ninety  days  payment  is  still  refused,  the 
attorney-general  is  required  to  bring  suit.3  Whenever  the 
deposits  of  a  bank  exceed  six  times  its  capital  and  surplus, 
additional  security  must  be  filed,  which  security  must  be 
equal  to  the  amount  of  the  excess.4 

Every  state  bank  and  trust  company  must  hold  a  certifi- 
cate from  the  bank  commissioner  stating  which  method  of 
protecting  deposits  it  has  elected.  Failure  to  hold  such 
a  certificate  is  punishable  by  forfeiture  of  the  charter.5 
Banks  are  allowed  to  advertise  that  they  are  "Guaranty 
Fund  Banks"  or  "Guaranty  Bond  Banks"  as  the  case 
may  be,  but  a  bank  that  advertises  that  its  deposits  are 
secured  by  any  other  method  than  the  two  provided  by 
law,  or  that  its  deposits  are  guaranteed  by  the  State  of 
Texas,  is  guilty  of  a  misdemeanor  punishable  by  fine  or 
imprisonment  or  both.6 

The  law  of  1909  also  made  more  stringent  the  regulation 
of  banks.  It  provides  that  no  state  bank  or  trust  company 
can  own  more  than  ten  per  cent  of  the  capital  stock  of  any 
other  banking  corporation,  unless  such  holding  was  for  the 
purpose  of  securing  itself  against  loss.7  It  provides  addi- 
tional penalties  for  bank  defalcation.  It  limits  the  amount 

1  Digest  of  State  Banking  Statutes,  p.  646. 

2  Ibid.,  p.  647.  *  Ibid..  *  Ibid.. 

•  Ibid..  «  Ibid.,  p.  641.  7  Ibid.,  p.  639. 


THE  TEXAS  SYSTEM  151 

of  indebtedness  to  the  bank  of  any  director  or  officer  of  the 
bank.1  One  of  the  most  significant  changes  was  in  respect 
to  the  relation  of  deposits  to  capital.  Texas  is  credited 
with  making  the  first  attempt  in  American  history  to  es- 
tablish an  arithmetical  relationship  between  the  deposits 
and  the  capital  of  a  bank.  With  a  capital  of  $10,000,  the 
deposits  of  a  bank  are  restricted  to  five  times  its  capital 
and  surplus;  with  a  capital  from  $10,000  to  $20,000,  to  six 
times  its  capital  and  surplus;  from  $20,000  to  $40,000,  to 
seven  times;  from  $40,000  to  $75,000,  to  eight  times;  from 
$75,000  to  $100,000,  nine  times;  and  if  capital  is  over 
$100,000,  to  ten  times  its  capital  and  surplus.  If  these 
amounts  are  exceeded,  then  within  sixty  days  the  bank 
must  increase  its  capital  twenty-five  per  cent.2  By  these 
additional  regulations  the  law  attempts  to  counteract  any 
tendencies  toward  reckless  banking  that  the  guaranty 
system  may  engender. 

From  the  very  beginning  the  "Depositors'  Guaranty 
Fund  System"  has  been  more  popular  with  the  banks. 
By  August  31,  1910,  541  banks  had  selected  this  plan  as 
against  43  that  had  selected  the  "Depositors'  Bond  Se- 
curity System."  8  On  December  1,  1915,  there  were  780 
banks  under  the  former  plan,  while  only  56  were  under  the 
bond  security  system.4  By  December  31,  1919,  the  num- 
bers were  942  and  41  respectively,  showing  that  the  guar- 
anty plan  continues  to  gain  at  the  expense  of  the  bond 
security  system.4 

The  Texas  law  has  never  been  taken  into  the  courts.  It 
went  into  operation  January  1,  1910,  and  by  August  31, 
1910,  the  depositors'  guaranty  fund  amounted  to  $431,- 
834.18.'  On  March  1,  1920,  it  amounted  to  $1,852,259.22, 
and  the  commissioner  announces  that  the  next  assessment 

Digest  of  State  Banking  Statutes,  p.  64«.  »  Ibid.,  p.  630. 

Report  of  the  Bank  Commissioner.  1910,  p.  5. 

Senate  Document,  no.  478,  64th  Congress,  1st  Session,  p.  3. 

Letter  from  the  bank  commissioner.  March  5,  1WO. 

Report  of  the  Bank  Commissioner,  1910,  p.  5. 


152    THE  GUARANTY  OF  BANK  DEPOSITS 

will  cause  the  fund  to  reach  the  legal  limit.1  Since  the  law 
became  effective,  upwards  of  $750,000  has  been  used  to 
pay  depositors  of  failed  banks.  But  these  failed  banks 
have  paid  substantial  dividends  and  the  approximate  loss 
to  date  has  been  about  $300,000.2 

3.  Bank  failures.  Since  the  law  went  into  operation 
there  have  been  fourteen  state  bank  failures  in  Texas.  A 
few  of  the  more  important  of  these  failures  will  be  de- 
scribed in  order  to  show  conditions  in  this  state.  In  a  num- 
ber of  them  the  loss  was  small,  while  hi  three  of  them 
the  guaranty  fund  was  reimbursed  in  full. 

The  first  bank  to  fail  was  the  Harris  County  Bank  and 
Trust  Company  of  Houston,  which  was  closed  on  Au- 
gust 7,  1911.  This  bank  had  non-interest-bearing  deposits 
amounting  to  about  $190,000.  Dishonest  banking  was  the 
main  cause  of  this  failure.  The  bank  commissioner  re- 
ported that  much  of  the  paper  of  the  bank  was  fraudulent ; 
that  many  forged  checks  had  been  drawn  on  depositors' 
accounts  and  fake  entries  made  in  the  books.3  Frank  W. 
Vaughan,the  president,  got  away  before  he  could  be  appre- 
hended, and  a  reward  of  $500  was  offered  for  his  arrest  and 
conviction.4  To  make  good  this  failure  $111,615.52  was 
drawn  from  the  guaranty  fund.  Since  the  closing  of  the 
bank  $72,550.16  has  been  collected  from  assets,  leaving  a 
net  loss  to  the  fund  of  $39,065.36.6 

The  second  failure  was  that  of  the  First  State  Bank  of 
Kopperl,  which  occurred  on  December  5, 1911.  This  was 
a  small  failure,  the  bank  having  non-interest-bearing  de- 
posits amounting  to  nearly  $16,000.  S.  J.  Spotts,  who  with 
associates  had  purchased  the  bank,  had  previously  served 
a  term  in  the  federal  penitentiary  at  Leavenworth,  Kansas, 
for  wrecking  a  national  bank  near  Paris,  Texas.  After  the 

1  Letter  from  the  bank  commissioner,  March  5,  1920.  *  Ibid.. 

*  Report  of  the  Bank  Commissioner,  1911-12,  p.  19. 

*  Ibid.,  p.  20. 

*  Letter  of  bank  commissioner  to  state  banks,  August  31, 1918. 


THE  TEXAS  SYSTEM  153 

failure  he  was  located  in  Los  Angeles,  California,  brought 
back  to  Texas  for  trial,  pleaded  guilty,  and  was  sentenced 
to  four  years  in  the  state  penitentiary.1  Eight  thousand 
dollars  was  drawn  from  the  guaranty  fund  to  pay  deposi- 
tors, but  since  the  failure  $4000  has  been  collected  on 
assets.2 

The  Paige  State  Bank,  of  Paige,  Texas,  was  closed  Feb- 
ruary 10,  1912.  The  deposits  of  this  bank  amounted  to 
over  $25,000.  This  failure  was  directly  caused  by  the 
president  of  the  bank  placing  $19,000  of  worthless  paper  in 
the  bank  on  February  3, 1912,  which  was  discovered  by  a 
special  examination  on  February  7.8  The  bank  commis- 
sioner in  commenting  on  this  failure  said:  "One  of  the  re- 
gretful conditions  that  exist  in  our  state  bank  system  is  the 
prevailing  idea  that  any  one  can  run  a  bank  even  without 
previous  experience,  and  also  that  anybody  can  get  a  per- 
mit to  start  a  bank  without  reference  to  financial  respon- 
sibility, character,  or  qualifications."  4  It  required  $13,- 
697.20  of  the  guaranty  fund  to  pay  depositors.  Collections 
on  assets  have  returned  about  ten  per  cent  of  this  amount 
to  the  fund,  but  the  bank  commissioner  thinks  little  more 
will  be  collected.5 

The  First  State  Bank  of  Amarillo  was  closed  on  April 
2,  1914.  This  failure  was  caused  by  the  bank  making  too 
many  long-time  loans  which  deteriorated  in  value  because 
of  adverse  crop  conditions.  The  guaranty  fund  was  drawn 
on  to  the  amount  of  $87,476.62.  Of  this  amount  $74,- 
355.11  has  been  collected  from  assets  and  returned  to  the 
fund  and  the  bank  commissioner  thinks  that  ultimately  it 
will  be  fully  reimbursed.9 

The  failure  of  the  Farmers'  and  Merchants'  State  Bank 

Report  of  the  Bank  Commuunoner,  1911-12,  p.  81. 

Senate  Document,  no.  478.  64th  Congress.  1st  Session,  p.  5. 

Report  of  the  Bank  Committioner.  1911-12,  pp.  21-24. 

Ibid.,  p.  23. 

Senate  Document,  no.  478,  64th  Congress,  1st  Session,  p.  5. 

Ibid.,  p.  t. 


154    THE  GUARANTY  OF  BANK  DEPOSITS 

of  Waco  required  $61,539.39  from  the  guaranty  fund  to 
pay  depositors,  but  the  bank  commissioner  expects  this 
bank  to  pay  one  hundred  per  cent  dividends.  To  pay  the 
depositors  of  the  Farmers'  and  Merchants'  State  Bank  of 
Teague  $92,363.36  was  taken  from  the  guaranty  fund. 
The  Department  of  Insurance  and  Banking  is  not  liquidat- 
ing this  bank,  as  the  attorney-general  filed  receivership 
proceedings  in  the  District  Court  of  Travis  County  and 
the  court  appointed  a  receiver.1  Already  $15,387.68  has 
been  recovered  from  assets,  but  the  balance,  $76,975.68, 
will  probably  be  a  total  loss.2 

The  failure  of  the  West  Texas  Bank  and  Trust  Company 
of  San  Antonio,  on  April  3,  1916,  represents  the  largest 
loss  that  the  guaranty  fund  has  sustained.  This  bank  at- 
tempted to  finance  a  number  of  real-estate  transactions, 
and  as  some  of  them  did  not  prove  profitable  heavy  losses 
were  sustained.  The  bank  was  reorganized  with  the  as- 
sistance of  some  of  the  more  influential  stockholders  and 
finally  took  over  the  entire  assets  of  the  defunct  bank. 
The  state  banking  board  paid  the  new  management  $200,- 
000  from  the  guaranty  fund  to  protect  it  from  loss  in  the 
liquidation  of  the  assets  of  the  failed  bank.  According  to 
the  commissioner  no  part  of  this  sum  will  ever  be  re- 
turned.3 

These  Texas  failures  are  fairly  representative  of  bank 
failures  in  general.  In  the  majority  of  cases  their  direct 
cause  was  due  to  human  depravity  and  incompetence 
which  even  the  more  stringent  banking  laws  of  1909  failed 
to  eliminate.  But  a  moment's  consideration  will  show  that 
conditions  in  Texas  might  have  been  much  worse.  Before 
1904  the  banking  system  of  Texas  consisted  of  national 
banks.  National  banks  are  of  necessity  banks  of  large 
-capital  and  resources.  This  fact  limits  their  field  of  opera- 

1  Letter  of  bank  commissioner  to  state  banks,  August  81,  1918. 

*  Report  of  the  Bank  Commissioner,  1918,  p.  21. 

*  Letter  of  bank  commissioner  to  state  banks,  August  31,  1918. 


THE  TEXAS  SYSTEM  155 

tion  to  communities  that  can  support  such  a  bank.  State 
banks  are  much  less  pretentious  institutions,  and  are  able 
to  enter  nearly  every  country  village.  When  the  constitu- 
tional amendment  of  1904  lifted  the  prohibition  on  state 
banks,  there  was  a  great  rush  to  fill  this  vacuum.  In  ten 
years  836  state  banks  were  chartered.  When  we  consider 
that  few  of  these  prospective  bankers  had  any  real  banking 
experience,  and,  further,  when  we  consider  the  task  con- 
fronting the  state  banking  board  of  issuing  so  many  char- 
ters and  looking  up  records  of  would-be  bankers,  it  must 
be  admitted  that,  on  the  whole,  the  work  has  been  well 
done.  Experience  has  shown  that  some  dishonest  and  in- 
competent men  were  permitted  to  engage  in  the  banking 
business,  but  when  the  mushroom  growth  of  the  state 
banking  system  is  considered  it  seems  remarkable  that 
more  of  the  same  kind  did  not  slip  in. 

The  conditions  in  Texas  have  been  much  less  favorable 
for  an  ideal  guaranty  experiment  than  those  of  Kansas  and 
Nebraska.  In  the  two  latter  states  the  state  banks  had 
been  long  established  and  economic  conditions  were  most 
favorable.  Texas,  on  the  other  hand,  rather  rashly  grafted 
a  guaranty  system  on  to  a  lot  of  newly  established  banks. 
This  was  a  dangerous  procedure  as  the  Oklahoma  experi- 
ence well  shows.  From  1912  to  1915  crop  conditions  were 
poor  and  the  cotton  market  unfavorable.  These  forces 
working  together  have  caused  more  trouble  with  bank 
failures  than  might  reasonably  be  expected.  But  while  in 
the  aggregate  the  loss  seems  rather  large,  the  burden,  when 
scattered  over  the  banks  of  that  vast  and  opulent  state,  has 
been  of  no  great  consequence.  The  bank  commissioner 
estimated  in  1916  that  up  to  that  time  "each  share  of  stock 
of  the  par  value  of  $100  has  paid  only  3$  cents  per  annum, 
or  21  cents  in  six  years,  for  this  insurance."  l  However, 
recent  losses  will  make  the  average  expense  somewhat 
more  than  the  above  figures. 

1  Senate  Document,  no.  478,  04th  Congress,  p.  3. 


156    THE  GUARANTY  OF  BANK  DEPOSITS 


4.  The  effects  of  the  law  on  the  state  and  the  national  banks. 
Attention  is  now  directed  to  the  relative  growth  of  the 
state  and  the  national  banks  in  Texas.  The  following 
table  shows  this  growth: 


Year 

Number  of 
ttate  bankt  * 

Number  of 
nat'l  banks  f 

Deposits  of 
ttate  banks  % 

Deposits  of 
nat'l  banks  § 

1905  

29 

440 

$1,731,000 

$101,285,000 

1906  

136 

483 

11,129,000 

116,331  000 

1907  

309 

521 

18,562,000 

141,803,000 

1908  

340 

535 

24,015,000 

115,843,000 

1909  

502 

523 

43,329,000 

139,024,000 

1910  

621 

519 

54,605,000 

145,249,000 

1911  

688 

513 

59,333,000 

156,083,000 

1912  

728 

515 

64,556,000 

179,736,000 

1913  

776 

517 

86,485,000 

183,623,000 

1914  

849 

519 

76,101,000 

174,033,000 

1915  

831 

535 

104,975,000 

185,100,000 

1916  

836 

532 

160,417,000 

255,348,000 

1917  

874 

540 

215,906,000 

310,374  000 

1918  

874 

543 

203,642,000 

333,717,000 

1919  

970 

336,018,000 

*  Report  of  the  Bank  Commissioner,  1918,  pp.  29-85. 
t  Report  of  the  Comptroller  of  the  Currency,  1918,  vol.  n,  p.  320. 
j  Senate  Document,  no.  478,  and  Reports  of  Bank  Commissioner, 
§  Report  of  the  Comptroller  of  the  Currency,  1918,  vol.  n,  p.  320. 

The  figures  for  the  period  covered  by  this  table  show 
that  the  field  of  operation  of  the  national  banks  was  well- 
nigh  occupied,  while  that  of  the  state  banks  was  just  being 
developed.  The  mushroom  growth  of  the  state  banks  was 
probably  not  affected  to  any  great  extent  by  the  guaranty 
law,  but  was  rather  the  result  of  the  rush  to  fill  the  vacuum 
that  existed  before  1904.  From  1908  to  1911  there  was  a 
steady  decline  in  the  number  of  national  banks.  This 
retrograde  movement  may  have  been  caused  by  the  guar- 
anty law,  or  it  may  have  been  due  to  the  pressure  of  the 
rapidly  growing  state  banks.  But  while  the  number  of  na- 
tional banks  declined  for  a  few  years,  their  deposits  in- 
creased rapidly.  This  growth  of  the  national-bank  deposits 
is  the  more  remarkable  when  it  is  considered  that  new  state 


THE  TEXAS  SYSTEM 


157 


banks  were  springing  up  on  every  side  of  the  national 
banks  and  would  naturally  absorb  many  of  their  deposits. 
The  national  banks  were  the  old  established  banks  of  the 


«oo-  iili'jii'ii'i'iniililiL-q  :;::::::: 
KO-    *li  1- 

*»-  i::::::!:::::::::::::::::::::::::::: 

ill  MS  

::::::::::::::i:|:::::::::::::::::: 

too-  tr 
1BO-      ::: 

MO-   :  |: 

i         i         i         i        i 

1        1        i        i 

1906    190ft   JL907  ,1908    J909    1910    1911    1912    4913    19U    1316    1916 

Number  of  State  Banks 

umber  of  National  Bank* 
not  absolute  change*  arc  plotted 

state;  they  had  their  friends,  and  this  was  a  great  help  in 
their  competition  with  the  new  state  banks  operating  under 
the  prestige  of  the  guaranty  law. 

On  March  1,  19*0,  the  guaranty  fund  amounted  to 


158    THE  GUARANTY  OF  BANK  DEPOSITS 

$1,852,259.22.  At  that  date  the  assessment  for  the  year 
1919  had  not  yet  been  made,  but  when  this  assessment  is 
added  to  the  fund  the  legal  limit  of  $2,000,000  will  be  ex- 


c 

Char 
of 

600-:::::?: 

:HART  vm. 

iges  in  Deposits  :::j::::::::: 
Texas  Banks  :::::::::::::: 
::!::^::::E:™::E!:|E:::!:!:::: 

iiiiijijjiijjj|::j:|i:jij;iii 

:::(::: 

800-':::-:: 

200-::':::: 

100-  

:  

it           Jill 

f|     itlmnl^MN  111 

I         * 

1906    1906    .1907    1908     1909    1910    1911    1912.1913    1914    1916     1916 

__ Deposits  of  State  Banks 

— — —  Deposits  of  National  Banks 
Percentage,  not  absolute  changes  are  plotted 

ceeded.  This  is  one  of  the  largest  funds  being  accumulated 
in  any  state,  but  the  number  of  banks  which  it  must  pro- 
tect is  rapidly  approaching  the  one  thousand  mark.  The 
Texas  law  is  being  ably  administered,  and,  if  economic 


THE  TEXAS  SYSTEM  159 

conditions  in  the  state  remain  normal,  its  operation  will 
undoubtedly  continue  uneventful.  However,  the  Texas 
law  harbors  two  elements  of  weakness.  It  attempts  to  pay 
depositors  at  once  and  at  the  same  time  makes  no  provision 
for  the  issuance  of  interest-bearing  certificates  with  which 
to  borrow  money  on  the  credit  of  the  guaranty  fund  should 
a  great  emergency  arise.  The  Oklahoma  experience  has 
furnished  the  proof  that,  should  the  unexpected  happen, 
such  a  plan  could  not  cope  with  the  situation. 


CHAPTER  VII 
DEPOSIT  GUARANTY  IN  OTHER  STATES 

1.  Unsuccessful  bank-guaranty  agitation.    The  bank-guar- 
anty propaganda  of  1908  extended  much  farther  than  the 
four  states  that  have  been  considered.    The  other  prin- 
cipal states  that  gave  the  subject  serious  consideration  were 
Arkansas,  Florida,  Mississippi,  Georgia,  Tennessee,  Iowa, 
Wisconsin,  Missouri,  Colorado,  Nevada,  Montana,  North 
Dakota,  and  South  Dakota.   In  most  of  these  states  bills 
providing  for  the  guaranty  of  bank  deposits  were  presented 
and  defeated.    In  some  cases  the  agitation  was  extremely 
feeble;  in  others  the  proposal  died  only  after  a  determined 
and   bitter  contest;  while  in  four  states  —  North  and 
South  Dakota,  Mississippi,  Washington  —  the  movement 
resurged  resulting  in  guaranty  laws  five  or  six  years  later. 
The  Colorado  Democrats,  being  greatly  influenced  by 
the  Denver  Convention,  adopted  a  deposit-guaranty  plank 
in  1908.   They  were  successful  at  the  November  election, 
and  when  the  legislature  met  in  January,  1909,  much  atten- 
tion was  given  to  such  legislation.  Two  guaranty  bills  were 
submitted  at  this  session.   One  bill  provided  for  a  mutual 
plan.  A  fund  to  protect  deposits  was  to  be  accumulated  by 
means  of  assessments  levied  upon  the  banks.   The  second 
bill  made  the  protection  of  deposits  an  individual  matter 
with  each  bank.    This  bill  provided  that  each  bank  should 
set  aside  an  amount  equal  to  one  per  cent  of  its  deposits. 
This  fund  was  to  be  invested  in  bonds  or  warrants  ap- 
proved by  the  bank  commissioner  and  deposited  with  the 
state  treasurer.  These  securities  were  to  be  held  as  a  pro- 
tection for  deposits  in  case  of  insolvency.   But  the  friends 
of  bank  guaranty  were  unable  to  unke  on  any  one  plan 
and  the  legislature  adjourned  without  passing  either  bill. 


DEPOSIT  GUARANTY  IN  OTHER  STATES    161 

The  matter  rested  here  until  1911  when  such  legislation 
was  again  urged.  A  bill  which  embodied  both  plans,  con- 
sidered two  years  before,  was  proposed  and  favorably  acted 
upon  by  the  legislature.  In  this  respect  it  was  like  the 
Texas  law.  Each  bank  was  given  an  option  between  two 
methods  of  securing  deposits.  One  was  by  the  mutual  plan 
proposed  in  1909,  which  provided  for  the  creation  of  a  fund 
equal  to  $1,000,000.  This  fund  was  to  be  accumulated  by 
an  assessment  the  first  year  of  one  per  cent  of  average  de- 
posits and  annually  thereafter  by  an  assessment  of  one 
fourth  of  one  per  cent  until  the  fund  was  accumulated.  The 
other  method  was  patterned  after  the  individual  plan  of 
1909.  Each  bank  was  required  to  deposit  collateral  security 
equal  to  its  capital  and  surplus  or  file  a  bond  which  was 
acceptable  to  the  bank  commissioner  to  the  same  amount. 
This  bill  passed  the  legislature  with  a  referendum  provision 
attached  requiring  that  it  be  submitted  to  the  people  for 
approval  before  it  should  become  a  law.  The  bill  was  never 
submitted,  for  before  the  next  general  election  the  District 
Court  at  Denver  declared  that  the  bill  had  been  passed 
illegally.  This  attempt  marked  the  end  of  the  agitation  in 
Colorado. 

The  State  of  Wisconsin  has  given  much  attention  to 
guaranty  legislation.  In  1910  the  legislature  sent  a  special 
committee  to  Oklahoma  to  study  the  situation.  The  Okla- 
homa system  had  just  been  staggered  by  a  three-million- 
dollar  failure  and  the  committee  returned  advising  against 
such  a  law  on  the  ground  that  it  engendered  bad  banking. 
However,  the  sentiment  for  such  legislation  was  so  strong 
that  a  guaranty  bill  was  introduced  and  it  only  failed  of 
enactment  by  a  tie  vote  in  the  Senate. 

There  was  violent  opposition  to  the  idea  on  the  part  of 
the  bankers,  and  when  the  guaranty  bill  was  defeated  they 
took  steps  to  forestall  such  legislation  in  the  future.  The 
plan  was  to  form  a  mutual  insurance  company  under  the 
direction  of  the  Wisconsin  Bankers'  Association  to  insure 


162    THE  GUARANTY  OF  BANK  DEPOSITS 

the  deposits  of  banks.  The  legislature  of  1911  passed  a  law 
permitting  the  formation  of  such  a  company,  and  the  Wis- 
consin Bankers'  Association  appointed  a  committee  to  work 
out  a  plan  of  organization.  A  plan  was  drawn  up  providing 
for  a  company,  membership  in  which  was  to  be  optional  on 
the  part  of  the  banks.  The  plan  was  presented  to  the  1912 
session  of  the  Wisconsin  Bankers'  Association  where  it 
precipitated  a  lively  discussion  and  was  referred  back  to 
the  committee  for  further  consideration.  Since  then  the 
subject  has  attracted  little  attention. 

2.  The  South  Dakota  system.  South  Dakota  stands  in  a 
peculiar  position  in  regard  to  the  guaranty  movement.  In 
that  state  both  the  Democrats  and  the  Republicans  in  1908 
took  their  stand  in  favor  of  such  a  law.  The  Republi- 
cans carried  the  state  and,  much  to  their  discomfort,  the 
responsibility  for  such  legislation  devolved  upon  them. 
Their  preelection  warmth  for  the  idea  was  prompted  by  fear 
rather  than  love.  In  the  meantime  an  intense  opposition  to 
such  legislation  had  developed  on  the  part  of  the  banks. 
Consequently  when  the  legislature  assembled  in  1909,  the 
majority  party  found  itself  in  a  predicament.  However,  to 
meet  campaign  pledges  a  most  ingenious  plan  was  hit  upon. 
A  voluntary  law  similar  to  that  of  Kansas  was  enacted,  but 
with  the  requirement  that  at  least  one  hundred  banks  must 
signify  their  intention  of  participating  in  the  law  before  it 
could  become  operative.  A  heavy  membership  fee  was 
also  required,  and  this,  in  conjunction  with  the  hostility  of 
the  banks,  was  sufficient  to  keep  the  law  from  getting  into 
operation. 

In  the  absence  of  bank  failures  this  adroit  political  move 
might  have  proved  satisfactory  to  the  people  of  South 
Dakota.  But  in  the  next  three  years  fourteen  failures  oc- 
curred with  losses  estimated  from  thirty  to  thirty-five  per 
cent.1  In  the  meantime  the  working  of  the  laws  in  the  other 
1  Letter  from  the  public  examiner,  South  Dakota. 


DEPOSIT  GUARANTY  IN  OTHER  STATES    163 

states  was  being  closely  watched,  and  South  Dakota  was 
undoubtedly  influenced  most  of  all  by  the  successful  oper- 
ation of  the  law  in  her  neighbor-state,  Nebraska.  South 
Dakota  became  convinced  that  such  legislation  was  sound, 
and,  stimulated  to  action  by  the  failure  of  banks,  the  legis- 
lature in  March,  1915,  enacted  a  new  guaranty  law. 

The  guaranty  system  of  South  Dakota  is  administered 
by  the  "Depositors'  Guaranty  Fund  Commission."  This 
commission  is  composed  of  the  public  examiner  and  three 
other  persons.  These  three  other  persons,  however,  are  not 
political  appointees,  for  the  governor  must  appoint  them 
from  a  list  of  twelve  persons  submitted  to  him  by  the  State 
Bankers'  Association.  South  Dakota  undoubtedly  got  this 
idea  from  Oklahoma,  where,  as  already  pointed  out,  the 
state  bankers  in  a  similar  manner  separated  the  control 
of  the  state  banking  board  from  the  influence  of  politics. 

In  most  other  respects  South  Dakota  has  patterned  her 
guaranty  system  after  that  of  Nebraska.  South  Dakota 
made  this  law  compulsory.  All  deposits  not  otherwise  se- 
cured are  protected.  The  annual  assessment  is  one  fourth 
of  one  per  cent  of  average  daily  deposits.  When  this  point 
is  reached  the  assessments  cease  until  the  fund  falls  below, 
one  per  cent.  When  the  assessments  become  due,  each 
bank  sets  aside  on  its  books  that  amount  to  the  credit  of  the 
depositors'  guaranty  fund  commission.  The  depositors  of 
a  failed  institution  are  paid  as  soon  as  the  public  examiner 
can  determine  the  amounts  due  them.  All  the  foregoing 
provisions  were  taken  bodily  from  the  Nebraska  law. 

The  South  Dakota  law  has  introduced  an  innovation  in 
that  it  makes  no  provision  for  extra  assessments.  Instead 
of  extra  assessments  it  provides  for  the  issuance  of  interest- 
bearing  certificates  in  the  event  that  the  guaranty  fund 
becomes  depleted.  It  apparently  assumes  that  over  a  long 
period  of  time  the  regular  assessment  of  one  fourth  of  one 
per  cent  will  be  safely  above  the  average  rate  of  loss.  In 
the  meantime  the  interest-bearing  certificates  will  take  care 


164    THE  GUARANTY  OF  BANK  DEPOSITS 

of  any  abnormal  loss.  This  assumption  of  the  law  is  prob- 
ably warranted,  for,  as  already  indicated,  the  average 
annual  rate  of  loss  in  the  national  banking  system  since  the 
Civil  War  has  been  only  one  twentieth  of  one  per  cent  of 
deposits.  If  the  South  Dakota  statute  is  honestly  and 
intelligently  administered  it  seems  unthinkable  that  losses 
over  a  long  period  of  time  could  average  annually  as  much 
as  one  fourth  of  one  per  cent  of  deposits. 

When  passing  this  guaranty  law  South  Dakota  at  the 
same  time  made  more  definite  and  stringent  the  criminal 
provisions  for  the  violation  of  the  general  banking  laws. 
In  this  connection  South  Dakota  has  introduced  another 
novelty.  The  law  authorizes  the  public  examiner  to  offer 
rewards  not  to  exceed  $300,  to  be  paid  from  the  guaranty 
fund,  "for  the  apprehension  and  production  of  any  person 
accused  of  violating  any  of  the  provisions  of  this  act."  l 
This  is  the  first  attempt  on  the  part  of  any  of  the  guaranty 
laws  to  make  the  banks  bear  a  part  of  the  expense  of  bring- 
ing bank  wreckers  to  justice. 

The  South  Dakota  guaranty  law  became  effective  Janu- 
ary 1,  1916.  With  the  collection  of  the  fourth  annual 
assessment  there  has  been  paid  into  the  guaranty  fund 
approximately  $900,000.  In  the  meantime  two  bank  fail- 
ures have  occurred.  The  first  bank  to  fail  required  $24,000 
from  the  guaranty  fund  to  pay  depositors,  but  when  the 
public  examiner  liquidated  the  assets  the  guaranty  fund 
was  completely  reimbursed.2  The  second  failure  required 
$130,000  from  the  guaranty  fund.  At  the  present  time  the 
assets  are  in  the  process  of  liquidation,  but  the  public  ex- 
aminer reports  that  the  indications  are  that  there  will  be 
very  little  loss.3  The  state  banks  seem  to  feel  that  the  law 
is  attracting  business,  although  it  is  as  yet  too  early  and 
conditions  have  been  too  abnormal  to  give  any  very  con- 

1  South  Dakota  Banking  Laws,  article  3,  section  22. 

1  Thirteenth  Biennial  Report  of  the  Public  Examiner,  p.  14. 

*  Letter  from  the  public  examiner,  March  13,  1920. 


DEPOSIT  GUARANTY  IN  OTHER  STATES    165 

elusive  statistical  proof  of  this.  The  law  unites  most  of 
the  strong  features  of  the  laws  in  the  other  states,  and  its 
degree  of  success  will  depend  in  large  part  on  the  efficiency 
of  its  administration. 

3.  The  Mississippi  system.  The  case  of  Mississippi 
furnishes  another  striking  example  of  the  resurgence  of  the 
deposit-guaranty  movement.  The  events  leading  up  to  the 
enactment  of  the  Mississippi  law  are  well  described  by  Mr. 
Thornton  Cooke: 

It  may  seem  a  far  cry  from  the  boll  weevil  to  deposit  guaranty. 
But  remembering  the  relation  of  the  chinch  bugs  in  the  Missouri 
Valley  to  the  free  silver  movement  of  the  nineties,  one  realizes 
that  an  insect  may  be  a  cause  of  financial  legislation  proposed  or 
enacted.  For  several  years,  in  Mississippi  south  of  the  33d  par- 
allel, the  cotton  crop  had  been  almost  destroyed  by  the  boll 
weevil.  In  a  typical  county.  Pike,  the  normal  crop  of  £5,000 
bales  fell  to  3600  bales  in  1913.  In  other  sections  of  the  state  the 
crop  was  injured  by  the  army  worm,  and  in  the  Delta  section  by 
overflows  from  the  Mississippi  River.  At  the  same  time  the  state 
banks  were  running  without  supervision.  The  statutes  were  not 
entirely  lacking  in  banking  provisions,  and  some  of  the  provisions 
were  in  themselves  very  good,  but  there  was  no  bank  examination 
and  no  verification  of  reports.  "In  a  word,"  says  a  Mississippi 
legislator,  "  Mississippi  state  banks  were  simply  chartered  by  the 
state  and  turned  loose  to  do  business  just  as  they  would." 

It  was  inevitable  that  many  banks  should  fail.  There  is  no 
official  list  of  the  failures,  but  a  list  privately  compiled  showed  22 
bank  failures  in  1912  and  1913  and  7  more  early  in  1914.  The 
deposits  were  not  ascertained  in  all  cases;  so  far  as  known,  they 
amounted  to  $4,600,000.  The  number  of  banks  reporting  to  the 
state  auditor  fell  from  342  in  June,  1911,  to  306  in  June,  1914. 
National  banks  increased  in  number  from  31  to  37.  There  was  an 
attempt  in  the  legislature  of  1912  to  enact  a  banking  law.  It 
failed  largely  because  the  Senate  and  House  could  not  agree  on 
the  method  of  selecting  the  bank  examiners.  A  majority  of  the 
Senate  wished  the  examiners  to  be  appointed,  while  the  House 
wanted  them  elected  by  popular  vote. 

By  1914  it  was  evident  that  something  must  be  done.  There 
was  a  bank  failure  just  as  the  legislature  met,  and  failures  oc- 
curred all  through  the  session.  Not  satisfied  now  with  a  bill  for 


166    THE  GUARANTY  OF  BANK  DEPOSITS 

safeguards  and  supervision,  many  legislators  insisted  from  the 
start  on  the  guaranty  of  bank  deposits.  The  Mississippi  Bank- 
ers' Association,  with  much  the  same  arguments  that  had  been 
used  before  the  legislatures  of  other  states,  opposed  the  guaranty 
sections  to  the  end.  It  is  possible  that  if  the  members  of  the 
Association  had  foreseen  the  ultimate  adoption  of  deposit  guar- 
anty, they  could  have  made  participation  optional  with  the  banks, 
and  could  have  provided  for  appointive,  instead  of  elective,  bank 
examiners.  After  a  long  struggle  a  bill  was  finally  passed  in 
March  and  was  signed  by  the  governor  March  9.1 

The  act  of  March  9, 1914,  created  a  banking  department 
in  many  respects  unique.  The  state  is  divided  into  three 
districts  corresponding  to  the  three  supreme  court  districts 
and  a  bank  examiner  for  each  district  is  elected  by  popular 
vote.  The  three  examiners  elected  choose  one  of  their 
number  as  chairman  and  a  majority  of  the  board  consti- 
tutes a  quorum.  Each  bank  examiner  is  supreme  in  his  own 
district.  The  function  of  the  board  and  its  chairman  is 
largely  to  secure  some  degree  of  cooperation  among  the 
three  examiners. 

It  has  been  said  that  these  three  examiners  are  elected 
by  the  people.  The  Mississippi  legislature  required  the 
state  banks  to  make  good  each  other's  bad  debts,  but  in 
the  same  breath  refused  the  banks  any  voice  in  their  own 
regulation.  This  was  both  unwise  and  unjust,  as  is  well 
shown  in  the  first  three  years  in  Oklahoma  when  the  state 
banking  board  consisted  of  five  state  officials.  But  Missis- 
sippi does  attempt  to  insure  the  election  of  men  whose 
technical  training  fits  them  for  the  position.  Before  a  man 
can  become  a  candidate  for  the  position  of  examiner  he 
must  have  passed  a  qualifying  examination.  This  exami- 
nation is  conducted  by  a  board  of  bank  commissioners. 
This  board  consists  of  three  persons. 

One  is  appointed  by  the  governor,  who  shall  be  a  successful 
banker  and  business  man;  one  by  the  attorney-general,  who  shall 

1  Quarterly  Journal  of  Economics,  1914,  29:419-£0. 


DEPOSIT  GUARANTY  IN  OTHER  STATES    167 

be  an  experienced  lawyer;  and  one  by  the  auditor,  who  shall  be  an 
experienced  accountant.1 

This  board  of  bank  commissioners 

shall  hold  a  written  examination  in  the  office  of  the  banking  de- 
partment on  the  subject  of  accounting,  the  theory  and  practice 
of  banking  and  the  banking  laws  of  the  State  of  Mississippi,  and 
the  federal  banking  laws.  To  each  person  who  attains  a  grade  of 
75  per  cent  or  more  on  said  examination  and  who  furnishes  satis- 
factory evidence  of  good  moral  character,  and  the  possession  of 
all  the  other  qualifications  set  out  in  section  3  of  this  act,  the  said 
examining  board  shall  issue  a  license  to  become  a  candidate  for 
state  bank  examiner,  which  license  shall  be  good  and  valid  for 
four  years  and  no  longer.* 

The  successful  candidate  at  the  election  becomes  the  bank 
examiner  for  his  district. 

It  would  seem  that  there  are  grave  doubts  as  to  the  wis- 
dom of  this  whole  complicated  procedure.  The  technique 
of  bank  examining  is  an  accomplishment  attained  largely 
through  years  of  experience  in  judging  men  and  values. 
Many  men  might  easily  pass  the  above  examination  and 
yet  be  unfit  for  bank  examiners.  Further,  the  term  of  office 
is  only  four  years  and  through  the  exigencies  of  politics  it 
may  easily  happen  that  an  examiner  will  be  turned  out  of 
office  just  when  he  is  becoming  a  valuable  official.  Finally, 
it  is  hard  to  see  any  reason  why  examiners  should  be  elected 
by  popular  vote,  for,  where  banks  are  compelled  to  guar- 
antee each  other's  deposits,  the  evil  effects  of  incompetent 
bank  examiners  will  fall  on  the  banks,  not  on  the  public. 

The  banking  law  became  effective  immediately  upon  its 
passage,  but  the  guaranty  feature  of  it  did  not  become 
compulsory  until  May  15,  1915.  Between  March  9,  1914, 
and  May  15,  1915,  banks  so  desiring  could  protect  their 
deposits  after  subjecting  themselves  to  a  rigid  examination 
and  paying  the  required  assessments.  After  May  15,  1915, 
the  guaranty  feature  became  compulsory  on  all  banks. 

1  Mistiitippi  Banking  Laic,  section  4.  '  Ibid.,  section  5. 


168    THE  GUARANTY  OF  BANK  DEPOSITS 

Mississippi  had  profited  by  Oklahoma's  folly  in  grafting  a 
guaranty  system  on  to  a  lot  of  struggling  banks  and  wisely 
gave  the  newly  created  banking  department  a  year  to  make 
examinations  and  weed  out  insolvent  banks. 

It  has  already  been  pointed  out  that  South  Dakota 
adopted  almost  bodily  the  Nebraska  system.  It  is  inter- 
esting to  note  that  Mississippi  was  powerfully  influenced 
by  the  Kansas  law,  the  only  important  exception  being 
that  a  compulsory  system  was  adopted.  All  deposits  not 
otherwise  secured  and  not  drawing  interest  at  more  than 
four  per  cent  are  protected  by  the  guaranty  fund.1  The 
annual  assessment  in  Mississippi  is  one  twentieth  of  one 
per  cent  of  average  daily  deposits,  but  in  computing  the 
amount  of  these  deposits  the  bank's  capital  and  surplus 
are  subtracted.2  However,  the  minimum  assessment  must 
be  at  least  $20.  These  assessments  continue  until  the  fund 
amounts  to  $500,000. 3  In  case  of  emergency  four  extra 
assessments  of  one  twentieth  of  one  per  cent  may  be  made 
in  any  one  year.4  All  assessments  are  paid  to  the  state 
treasurer  and  held  by  him  in  the  state  depository  banks.5 
As  an  evidence  of  its  good  faith  each  bank  must  deposit 
with  the  state  treasurer  United  States,  state,  or  municipal 
bonds,  or  cash,  to  the  amount  of  $500  for  every  $100,000 
of  deposits  or  fraction  thereof,  minus  its  capital  and  sur- 
plus.6 

When  a  bank  becomes  insolvent  it  is  closed  and  liqui- 
dated by  the  bank  examiner.  The  depositors  are  not  paid 
at  once,  but  are  given  interest-bearing  certificates.7  As  the 
examiner  realizes  upon  the  assets  of  the  bank  he  applies  the 
proceeds  to  the  payment  of  these  outstanding  certificates. 
If  the  liquidated  assets,  including  the  double  liability  of 
stockholders,  are  not  sufficient  for  this  purpose,  the  bank 
examiner  certifies  to  the  board  of  bank  examiners  the  bal- 

1  Mississippi  Banking  Law,  section  38.  *  Ibid.,  section  35. 

1  Ibid..  4  Ibid..  *  Ibid.. 

•  Ibid.,  section  34.  7  Ibid.,  section  36. 


DEPOSIT  GUARANTY  IN  OTHER  STATES    169 

ance  yet  due  and  this  board  makes  a  requisition  on  the 
state  treasurer  to  pay  the  deficiency  from  the  guaranty 
fund.1  It  will  be  noted  that  all  of  these  provisions  are  the 
identical  provisions  of  the  Kansas  law. 

On  January  1,  1920,  the  guaranty  fund  consisted  of 
$178,587.41  in  cash,  $70,500  invested  in  bonds,  and  $92,- 
483.57  invested  in  guaranty  certificates.  Since  the  failed 
banks  for  which  these  certificates  were  issued  have  not 
been  liquidated  it  is  patent  that  the  last  item,  $92,483.57, 
may  be  a  heavy  charge  against  the  guaranty  fund.  Since 
the  law  became  effective  five  banks  whose  deposits  were 
guaranteed  have  failed.  Under  the  law  certificates  were 
issued  to  depositors  at  once,  but  since  the  banks  have  not 
been  fully  liquidated,  it  is  too  early  to  tell  what  percentage 
of  these  certificates  will  be  a  charge  against  the  fund.  In 
order  to  relieve  the  banks  that  were  carrying  these  guar- 
anty certificates  the  banking  department  made  special 
assessments  and  with  the  proceeds  took  over  some  of  the 
certificates.  Besides  the  regular  annual  assessment  of  one 
twentieth  of  one  per  cent  two  special  assessments  each  of 
the  same  amount  were  made  in  1918  and  three  in  1919. 
The  board  of  bank  examiners  estimates  that  the  regular 
assessment  to  be  collected  in  January,  1920,  will  be  suffi- 
cient to  take  up  all  of  the  outstanding  guaranty  certifi- 
cates. The  board  also  estimates  that  the  assets  upon  which 
these  certificates  have  claim  amount  to  $79,000.  Counting 
the  total  collections  to  date,  therefore,  it  would  seem  that 
the  net  loss  through  bank  failures  will  cost  the  guaranty 
fund  approximately  $350,000.2 

The  trouble  Mississippi  has  experienced  with  bank  fail- 
ures is  an  inheritance  from  the  days  when  her  state  banks 
operated  without  supervision.  It  is  true  that  a  year  was 
allowed  the  bank  examiners  to  make  examinations  and  get 

1  Mittiirippi  Ranking  Law,  section  36. 

1  The  material  for  tin*  paragraph  has  been  obtained  from  the  Biennial 
Report  of  the  Department  of  Banking,  1918-19.  The  estimate  of  the  net 
loss  is  made  by  the  writer. 


170    THE  GUARANTY  OF  BANK  DEPOSITS 

the  banks  into  a  condition  to  come  under  the  protection  of 
the  guaranty  law,  but  the  problem  of  determining  which 
banks  to  admit  and  which  to  liquidate  was  a  hard  one,  and 
it  now  seems  clear  that  some  were  admitted  that  should 
have  been  closed.  Notwithstanding  these  failures  both  the 
banks  and  the  public  appear  to  be  well  satisfied  with  the 
beginning  they  have  made. 

4.  The  Washington  system.  Attention  has  already  been 
directed  to  the  anomalous  fact  that  bank-guaranty  legisla- 
tion was  for  a  time  restricted  to  a  series  of  contiguous 
states  extending  from  North  Dakota  south  to  the  Gulf. 
In  1914  Mississippi  extended  the  idea  into  the  Old  South, 
and  three  years  later  the  State  of  Washington  carried  it  to 
the  Pacific  Coast.  It  was  natural  that  states  neighboring 
Oklahoma  should  copy  such  legislation,  for  in  the  early 
stages  of  the  movement  it  was  felt  that  the  Oklahoma 
banks  were  working  at  a  great  advantage.  But  Washing- 
ton was  far  removed  from  this  influence,  and  for  this  reason 
it  is  of  interest  to  watch  the  development  of  the  movement 
in  this  latest  convert  to  such  legislation. 

In  Washington  deposit  guaranty  long  had  its  friends 
who  were  watching  the  operation  of  the  laws  in  the  other 
states.  At  two  different  sessions  of  the  legislature  prior  to 
1917  guaranty  bills  were  presented,  only  to  meet  defeat. 
But  the  sentiment  for  such  a  law  was  gradually  gaining 
ground,  and  the  friends  of  the  proposition  felt  sure  of  vic- 
tory when  the  legislature  convened  in  1917.  It  so  hap- 
pened, however,  that  while  this  legislature  was  in  session, 
four  bank  failures  occurred  in  the  city  of  Seattle,  and  the 
fate  of  the  pending  bill  was  no  longer  in  doubt. 

For  the  most  part  Washington  copied  the  Kansas  law. 
The  law  is  voluntary,  banks  entering  and  withdrawing 
from  the  system  as  they  see  fit.  The  administrative  ma- 
chinery of  the  system  consists  of  the  guaranty  fund  board 
which  is  composed  of  the  governor,  the  state  examiner,  and 


DEPOSIT  GUARANTY  IN  OTHER  STATES    171 

three  other  members  appointed  by  the  governor.  Two  of 
these  last  three  members  must  be  officers  or  directors  of 
member  banks.1  A  bank  to  be  eligible  to  membership  must 
have  an  unimpaired  surplus  equal  to  ten  per  cent  of  its 
capital  stock,  must  have  been  in  existence  at  least  a  year, 
and  must  subject  itself  to  "a  complete  and  rigid  examina- 
tion." 2  When  it  complies  with  these  requirements  the 
state  bank  examiner  issues  to  it  a  certificate  which  states 
that  its  deposits  not  otherwise  secured  are  guaranteed  by 
the  Washington  bank  depositors'  guaranty  fund.  How- 
ever, "  the  guaranty  provided  in  this  act  shall  not  apply  to 
a  bank's  obligation  as  an  endorser  upon  bills  rediscounted, 
nor  to  bills  payable,  nor  to  money  borrowed  from  its  cor- 
respondents or  others,  nor  to  deposits  of  public  funds  in 
excess  of  its  capital  and  surplus."  s 

The  guaranty  fund  consists  of  one  half  of  one  per  cent  of 
the  total  annual  average  daily  deposits  eligible  to  guaranty 
of  member  banks.  As  a  pledge  for  the  payment  of  their 
assessments  member  banks  must  deposit  securities  to  the 
face  value  of  $1000  for  every  $100,000  of  deposits  or  major 
portion  thereof.4  Should  the  guaranty  fund  become  re- 
duced by  more  than  twenty-five  per  cent  of  this  amount 
the  guaranty-fund  board  "shall  determine  whether  it  is 
necessary  or  expedient  to  make  an  assessment  on  the  mem- 
ber banks,"  but  no  more  than  one  half  of  one  per  cent  of 
the  total  amount  of  average  daily  deposits  eligible  to  guar- 
anty shall  be  assessed  in  any  calendar  year.6  If  a  member 
bank  is  found  to  be  violating  the  law  it  is  given  thirty  days 
in  which  to  comply,  and,  if  it  fails  to  do  this,  it  loses  its 
membership  and  forfeits  to  the  guaranty  fund  both  its 
assessments  paid  into  the  fund  and  the  bonds  that  were 
pledged  as  security  for  the  payment  of  its  assessments. 
The  state  bank  examiner  takes  charge  of  a  bank  when  it 

1  Guaranty  Fund  Act  of  the  Statt  of  Washington,  section  3. 
1  Ibid.,  sections  6  and  8.  '  Ibid.,  section  10. 

4  Ibid.,  section  £.  *  Ibid.,  section  11. 


172    THE  GUARANTY  OF  BANK  DEPOSITS 

becomes  insolvent,  and,  upon  proof  of  claim,  issues  a  war- 
rant to  every  guaranteed  depositor.  Should  there  not  be 
sufficient  money  in  the  guaranty  fund  to  pay  warrants, 
they  draw  interest  at  five  per  cent  until  called.1 

The  act  was  signed  by  the  governor  March  10,  1917. 
Before  the  end  of  the  year  46  banks  and  3  branches  had 
qualified  and  been  admitted  to  membership.  In  1918  the 
number  joining  was  39  banks  and  2  branches,  and  in  1919 
it  was  19,  making  a  total  of  104  banks  and  5  branches,  or 
about  39  per  cent  of  the  banks  of  the  state.  On  December 
31,  1919,  the  guaranty  fund  amounted  to  $245,338.55.2 

In  1918  the  state  bank  examiner  made  the  following 
comment  on  the  operation  of  the  law: 

The  one  year  and  six  months  of  operation  of  the  guaranty  fund 
has  demonstrated  that  the  benefits  resulting  to  the  banks  par- 
ticipating in  the  system  are  considerable  and  its  success  is  en- 
tirely assured.  From  a  dollars  and  cents  standpoint  it  is  firmly 
believed  that  the  increased  earnings  accruing  to  the  banks  as  a 
direct  result  of  the  increase  of  business  because  of  membership  in 
the  fund  will  more  than  balance  any  expense  connected  with  it.3 

As  yet  it  is  too  soon  to  give  definitive  statistical  proof  of 
the  issues  raised  in  the  above  quotation.  In  drafting  her 
law  Washington  has  profited  by  the  experience  of  other 
states,  and  it  now  remains  to  be  seen  whether  the  state 
realizes  the  equal  importance  of  its  unflinching  enforce4- 
ment. 

5.  The  North  Dakota  system.  The  North  Dakota  and 
the  Washington  bank-guaranty  laws  were  approved  on  the 
same  day,  namely,  March  10,  1917.  Agitation  for  such  a 
law  in  North  Dakota  covered  a  period  of  nearly  thirty 
years,  but  it  was  only  after  the  passage  of  the  South 
Dakota  guaranty  law  that  it  made  much  headway.  A 

1  Guaranty  Fund  Act  of  the  State  of  Washington,  section  18. 
1  Thirteenth  Annual  Report  of  the  State  Bank  Examiner,  p.  7. 
*  Twelfth  Annual  Report  of  the  State  Bank  Examiner,  p.  8. 


DEPOSIT  GUARANTY  IN  OTHER  STATES    173 

farmers'  legislature  was  responsible  for  the  law,  although 
a  goodly  number  of  bankers  favored  the  measure  because 
they  believed  the  South  Dakota  law  was  attracting  de- 
posits and  they  naturally  feared  the  competition  of  the 
guaranteed  banks  in  their  neighboring  state.  As  a  whole, 
however,  it  is  probable  that  the  bankers  opposed  the  bill. 

In  the  main  the  North  Dakota  law  resembles  the  Ne- 
braska and  South  Dakota  guaranty  statutes.  The  law  is 
compulsory;  all  banks  must  qualify  and  pay  assessments  or 
liquidate.  The  North  Dakota  system  is  administered  by  the 
Depositors'  Guaranty-Fund  Commission  which  is  com- 
posed of  the  governor,  the  state  examiner,  and  three  other 
persons  appointed  by  the  governor.  Persons  eligible  to 
appointment  to  these  three  places  on  the  commission 
"shall  have  had  at  least  five  years'  experience  in  the  man- 
agement of  some  bank  or  banks  located  within  the  State 
of  North  Dakota  and  shall  be  an  official  of  some  bank 
which  is  directly  affected  by  the  provisions  of  this  Act."  l 

All  deposits  not  otherwise  protected  are  subject  to 
guaranty,  and  no  additional  security  is  required  from  banks 
becoming  a  public  depository.  The  annual  assessment 
which  each  bank  must  pay  consists  of  one  twentieth  of  one 
per  cent  of  its  average  daily  deposits  for  the  preceding 
year.  This  assessment  continues  until  the  guaranty  fund 
reaches  one  per  cent  of  the  average  daily  deposits.  Should 
the  fund  become  depleted  below  three  fourths  of  one  per 
cent  of  these  deposits,  special  assessments  may  be  made, 
but  no  more  than  four  special  assessments  of  one  twen- 
tieth of  one  per  cent  may  be  made  in  any  one  year.5 

The  banks  are  given  the  custody  of  the  fund.  Each 
bank  is  notified  as  to  the  amount  of  its  assessments  and  it 
then  credits  this  amount  to  the  depositors'  guaranty  fund 
to  be  paid  on  demand  to  the  Depositors'  Guaranty-Fund 
Commission.  North  Dakota  requires  no  special  deposit  of 

1  North  Dakota  Depositors'  Guaranty  Lav,  section  1. 
1   Ibid*  section  7. 


174     THE  GUARANTY  OF  BANK  DEPOSITS 

cash  or  securities  from  banks  as  a  guaranty  for  the  payment 
of  their  assessments,  but  failure  to  credit  the  fund  with  its 
assessment  makes  a  bank  subject  to  a  daily  fine  of  ten 
dollars  for  the  first  twenty  days  and  at  the  end  of  thirty 
days  the  state  examiner  must  liquidate  the  recalcitrant 
bank. 

When  a  bank  failure  occurs,  the  state  examiner  ascer- 
tains the  amount  due  each  depositor.  He  then  determines 
the  proportionate  amount  necessary  to  draw  on  each  of 
the  remaining  solvent  banks  to  pay  the  depositors  and  cer- 
tifies this  information  to  the  Depositors'  Guaranty-Fund 
Commission.  The  treasurer  of  the  commission  then  draws 
against  the  banks  and  pays  the  depositors.  Should  the 
fund  be  unable  to  meet  the  loss,  a  certificate  of  indebtedness, 
negotiable  in  form  and  bearing  five  per  cent  interest,  is  is- 
sued in  favor  of  the  insolvent  bank. l  This  certificate  becomes 
due  and  payable  on  the  first  day  of  March  next  succeeding 
the  date  of  issue  and  is  paid  out  of  the  first  money  accruing 
to  the  guaranty  fund.  Banks  are  not  permitted  to  pay, 
directly  or  indirectly,  more  than  five  per  cent  on  deposits 
unless  authorized  by  the  Depositors'  Guaranty-Fund  Com- 
mission, and  in  no  case  shall  the  rate  exceed  six  per  cent. 

On  March  1,  1920,  the  guaranty  fund  amounted  to  $77,- 
843.  To  that  date  one  bank  had  failed  and  the  state  ex- 
aminer estimates  that  the  loss  will  be  about  fifteen  thou- 
sand dollars.  This  three-year  period  of  the  law's  operation 
has  witnessed  rapidly  rising  prices,  and  when  prices  are 
advancing  the  assets  of  banks  are  of  course  favorably 
affected.  The  period  has  been  manifestly  too  abnormal 
for  a  test  of  the  law. 

For  a  few  years  following  the  enactment  of  the  first  four 
guaranty  laws  it  was  quite  generally  believed  that  the 
movement  was  only  an  ephemeral  flurry.  The  passage 
of  the  Mississippi,  South  Dakota,  Washington,  and  North 
Dakota  laws,  some  five  years  later,  shows  that  this  idea 
1  North  Dakota  Depositors'  Guaranty  Law,  section  15. 


DEPOSIT  GUARANTY  IN  OTHER  STATES    175 

must  be  materially  modified.  Of  late  years  there  has  been 
persistent  agitation  in  Congress  for  the  guaranty  of  de- 
posits in  national  banks,  and  the  Comptroller  of  the 
Currency  in  his  Report  for  1917  urges  the  guaranty  of  de- 
posits in  these  banks  where  the  deposit  does  not  exceed 
$5000  for  any  one  individual.  The  modern  guaranty  move- 
ment, extending  over  a  period  of  twenty-five  years,  has 
been  most  active  when  stimulated  by  numerous  bank  fail- 
ures. Bank  failures  show  a  great  tendency  to  concentrate 
not  only  because  of  their  relation  to  periods  of  economic 
depression,  but  also  because  of  the  tendency  of  one  bank 
to  pull  down  others  with  it.  This  concentration  of  failures 
also  serves  to  concentrate  public  attention.  In  the  mean- 
time the  actual  operation  of  guaranty  laws  in  eight  states 
is  rapidly  giving  us  facts  as  to  the  practicability  of  ex- 
tending the  principles  of  insurance  to  this  field  of  bank 
losses.  The  experience  of  South  Dakota,  Mississippi, 
Washington,  and  North  Dakota  serves  to  show  that  a 
proper  conjuncture  of  events  may  at  any  time  bring  other 
states  face  to  face  with  the  same  proposition. 


CHAPTER  VIII 
THE  EFFECTS  OF  THE  LAWS 

1.  The  purpose  of  this  chapter.  The  review  of  the  various 
bank-guaranty  laws  has  now  been  completed.  In  giving  an 
account  of  these  laws  little  more  has  been  attempted  than 
to  set  forth  the  facts  as  to  the  workings  of  the  laws  in  the 
several  states.  With  these  facts  before  us  it  is  now  our  pur- 
pose, by  bringing  them  together,  to  see  what  light  they 
throw  on  some  of  the  much-mooted  questions  of  bank 
guaranty. 

At  the  very  outset  great  difficulty  is  encountered.  In 
no  two  states  is  the  guaranty  system  exactly  the  same. 
Again,  the  social  and  economic  conditions  in  these  states 
differ  widely.  Some  states  have  been  members  of  the  Union 
for  over  half  a  century;  they  have  recovered  from  the 
youthful  weakness  incident  to  their  boom  days,  and  are  now 
pressing  forward  on  sane  and  conservative  lines.  In  one 
state  the  reverse  of  this  has  been  found  —  that  its  guar- 
anty law  was  grafted  on  to  a  banking  system  which  scarcely 
existed  and  that  its  operation  has  been  confined  to  the 
period  covering  the  most  acute  growing  pains  of  the  new 
state.  These  diverse  conditions  make  general  conclusions 
dangerous,  but  at  the  same  time  they  make  possible  a 
many-sided  view  of  this  banking  experiment  in  action. 

Few  questions  that  have  attracted  public  attention  have 
been  more  debated  than  this.  Three  classes  have  taken 
part  in  this  discussion.  In  the  first  place,  this  question 
passed  through  one  of  our  most  heated  presidential  cam- 
paigns as  a  prominent  issue,  where  the  politicians  fought 
against  each  other,  neither  side  leaving  unturned  a  stone 
that  might  conceal  valuable  political  material.  In  the  sec- 
ond place,  the  guaranty  proposal  threatened  to  touch  the 


THE  EFFECTS  OF  THE  LAWS  177 

pocket-book  of  every  banker  of  the  country.  Some  bankers 
obviously  it  would  help,  others  it  would  injure.  This  pro- 
voked among  the  bankers  the  most  bitter  controversy  that 
has  ever  attended  any  of  our  banking  and  currency  dis- 
cussions. Finally,  the  professional  economist  has  passed 
this  subject  in  review.  This  discussion  sharply  defined  the 
arguments  for  and  against  such  a  law,  and  now,  after 
twelve  years  of  the  operation  of  the  various  laws,  we  are  in 
possession  of  many  facts  by  which  to  test  the  validity  of 
such  arguments. 

2.  The  necessity  of  guaranty  legislation.  The  first  point 
on  which  this  controversy  centered  was  as  to  the  necessity 
of  such  legislation.  One  side  contended  that  undue  em- 
phasis was  being  placed  on  the  hardship  which  depositors 
suffer  from  loss  of  deposits.  The  surprisingly  low  rate  of 
loss  to  depositors  since  the  establishment  of  the  national 
banking  system  was  pointed  out;  also  that  the  establish- 
ment of  postal  savings  banks  would  bring  facilities  for  the 
safe-keeping  of  savings  to  the  door  of  every  citizen  of  the 
land.  Bank  guaranty  is  primarily  for  the  protection  of 
commercial  deposits  and  the  contention  was  that  such  de- 
posits did  not  warrant  such  action.  As  a  rule  a  commer- 
cial deposit  is  the  result  of  an  individual  taking  collateral 
to  a  bank  and  getting  a  loan  on  it.  The  bank  takes  the 
collateral,  and,  instead  of  giving  to  the  individual  currency, 
credits  him  with  a  deposit  against  which  he  has  a  right  to 
draw.  A  guaranty  of  such  a  deposit  is  a  guaranty  that  the 
bank  will  meet  its  loan,  and  a  guaranty  law  is  nothing  more 
than  a  law  requiring  banks  to  guarantee  each  other's  loans. 
The  opponents  of  the  scheme  maintained  that  there  is  no 
more  justification  for  a  fund  to  guarantee  such  loans  than 
for  a  fund  to  guarantee  loans  made  between  individuals. 

Even  a  cursory  examination  shows  that  this  argument 
is  extreme.  First,  as  regards  the  contention  that  losses 
occasioned  by  bank  failures  have  been  exaggerated.  It  is 


178    THE  GUARANTY  OF  BANK  DEPOSITS 

quite  impressive  to  cite  the  fact  that  the  average  annual 
loss  to  depositors  of  national  banks  since  1863  has  been 
only  one  twentieth  of  one  per  cent  of  deposits.  But  when 
the  situation  is  viewed  from  another  angle  it  takes  on  a 
different  aspect.  From  1863  to  1916  national  banks  to  the 
number  of  566  have  failed  with  net  losses  to  depositors  of 
over  $51,000,000.1  This  means  that  depositors  of  national 
banks  have  lost  on  the  average  nearly  a  million  dollars  a 
year.  Moreover,  when  it  is  considered  that  state  banks 
outnumber  national  about  two  to  one  and  that  their  super- 
vision is  usually  much  less  efficient,  it  is  evident  that  the 
total  losses  from  all  bank  failures  assume  an  imposing  fig- 
ure. It  is,  therefore,  altogether  arbitrary  to  say  that  losses 
have  been  so  insignificant  as  to  be  unworthy  of  considera- 
tion. 

The  harm  done  by  bank  failures  is  accentuated  by  the 
fact  that  they  have  a  tendency  to  concentrate  in  periods  of 
depression  when  the  community  is  ill-prepared  to  sustain 
the  shock.  This  is  shown  by  the  fact  that  in  Kansas  and 
Nebraska  between  1890  and  1896  over  a  hundred  banks 
failed  in  each  state.  The  effect  of  deposit  insurance  is  to 
scatter  this  shock  over  longer  periods  of  time.  From  the 
standpoint  of  society  there  is  no  question  but  that  this  is 
highly  desirable.  The  only  question  is  whether  the  possi- 
ble effect  of  guaranty  laws  in  stimulating  reckless  banking 
more  than  offsets  the  salutary  effects  of  such  laws.  These 
questions  will  shortly  receive  full  consideration. 

It  is  also  an  exaggeration  to  say  that  there  is  no  more 
reason  to  guarantee  bank  loans  than  there  is  to  guarantee 
loans  between  individuals.  Since  a  bank,  in  common  with 
other  corporations,  is  a  creation  of  the  law,  it  becomes  what 
might  be  called  a  quasi-public  institution.  Aggregations  of 
persons  and  capital  doing  business  under  the  corporate 
form  are  given  a  legal  and  consequently  a  public  recognition 
that  is  a  valuable  credit  asset,  and  the  state,  especially  in 

1  Report  of  the  Comptroller  of  the  Currency,  1915,  vol.  u,  pp.  108-09. 


THE  EFFECTS  OF  THE  LAWS  179 

this  country  in  the  case  of  banking  corporations,  has  always 
made  the  attempt  to  see  that  this  credit  was  not  abused. 
Furthermore,  probably  more  than  three  fourths  of  all  de- 
posits are  created  by  loans  and  the  deposit  currency  that 
rests  on  these  loans  transacts  a  large  part  of  the  business  of 
the  country.  Because  of  this  role  played  by  deposit  cur- 
rency, the  business  stability  of  a  community  becomes  in- 
timately connected  with  the  stability  of  bank  loans.  Jus- 
tice Holmes,  of  the  United  States  Supreme  Court,  stated 
the  case  as  follows: 

It  may  be  said  in  a  general  way  that  the  police  power  extends  to 
all  the  great  public  needs.  .  .  .  Among  matters  of  that  sort  prob- 
ably few  would  doubt  that  both  usage  and  preponderant  opinion 
give  their  sanction  to  enforcing  the  primary  conditions  of  suc- 
cessful commerce.  One  of  those  conditions  at  the  present  time  is 
the  possibility  of  payment  by  checks  drawn  against  bank  deposits, 
to  such  an  extent  do  checks  replace  currency  in  daily  life.  If,  then, 
the  legislature  of  the  state  thinks  that  the  public  welfare  requires 
the  measure  under  consideration,  analogy  and  principle  are  in 
favor  of  the  power  to  enact  it.  It  is  asked  whether  the  state  could 
require  all  corporations  or  all  grocers  to  help  to  guarantee  each 
other's  solvency,  and  where  we  are  going  to  draw  the  line.  But  the 
last  is  a  futile  question,  and  we  will  answer  the  others  when  they 
arise.1 

Banking  institutions  gather  in  the  funds  that  the  public 
is  temporarily  not  using  and  lend  to  private  parties  the 
credit  which  the  bank  erects  on  this  foundation.  Because 
of  their  intimate  relation  to  the  public  banks  have  become 
quasi-public  institutions.  The  state  in  throwing  safe- 
guards around  these  institutions  can  make  banks  as  safe  as 
the  men  who  run  them.  It  is  this  personal  element  in  bank- 
ing which  causes  the  trouble.  The  law  requires  of  each 
banker  that  he  be  honest  and  the  possessor  of  good  judg- 
ment, and  the  state  employs  bank  examiners  and  other  offi- 
cials to  ascertain  these  qualities.  But  no  laboratory  method 
has  been  devised  by  which  to  determine  without  the  possi- 
1  Noble  State  Bank  r.  Uaskell  219  U.S.  104,  110.  112. 


180    THE  GUARANTY  OF  BANK  DEPOSITS 

bility  of  error  the  good  judgment  or  the  honesty  of  men. 
The  average  individual  is  helpless  in  protecting  himself 
from  this  quarter.  He  may  have  a  choice  as  to  where  he 
will  deposit,  but  the  fact  remains  that  he  must  deposit 
somewhere.  The  fact  that  expert  bank  examiners,  and 
even  the  directors  themselves,  are  often  deceived  shows 
that  this  freedom  of  choice  is  an  empty  consolation  to  the 
individual.  No  banking  regulations  have  yet  been  devised 
which  will  prevent  incompetent  and  unscrupulous  men 
from  wrecking  banks.  The  guaranty  laws  have  cut  this 
Gordian  knot  by  requiring  banks  mutually  to  insure  their 
deposit  liabilities. 

/  ^-  3.  Bank  guaranty  as  a  cure  for  panics.  It  will  be  remem- 
bered that  Oklahoma  presented  bank  guaranty  to  the 
world  as  a  panacea  for  panics.  Being  twelve  years  re- 
moved from  the  panic  it  is  difficult  to  realize  the  appeal 
which  this  argument  made  at  the  time.  The  newspapers 
and  periodicals  of  that  day  abound  with  the  expressions  of 
both  bankers  and  individuals  who  implicitly  believed  that 
panics  would  be  impossible  if  people  had  the  assurance  that 
their  deposits  were  safe.  This  was  the  theory  of  the  argu- 
ment, and  while  there  have  been  no  panics  to  test  it,  the 
operation  of  the  laws  shows  pretty  conclusively  the  limita- 
tions of  such  a  device  as  a  panic  cure. 

Panics  can  be  prevented  in  only  two  ways,  namely, 
either  by  removing  the  causes  or  by  cutting  short  the  panic 
at  its  inception.  Even  a  casual  consideration  of  the  causes 
will  suffice  to  show  that  bank  guaranty  could  hi  no  way 
eliminate  them.  Like  death,  panics  may  result  from  many 
causes,  and  bank  guaranty  is  as  likely  to  aggravate  as  to 
alleviate  some  of  them.  It  is  generally  conceded  that  one 
of  the  principal  causes  of  panics  is  speculation  and  the 
over-extension  of  credit.  The  speculative  propensity  is 
one  of  the  weaknesses  of  human  nature.  When  we  become 
so  adept  at  the  art  of  lawmaking  as  to  be  able  to  legislate 


THE  EFFECTS  OF  THE  LAWS  181 

mankind  into  the  kingdom  of  Heaven,  then  only  may  we 
be  able  to  construct  a  law  which  will  deprive  him  of  this 
most  human  characteristic.  As  for  the  over-extension  of 
credit  it  is  possible  that  bank  guaranty  is  an  additional 
irritant.  Bank  deposits  are  the  basis  of  the  extension  of 
credit  and  in  so  far  as  such  a  law  draws  money  out  of  hoard- 
ing and  augments  the  deposits  of  banks,  just  so  far  does  it 
aggravate  this  cause  of  panics.  Other  causes,  such  as  wide- 
spread crop  failures,  earthquakes,  and  destructive  wars,  it 
is  evident  are  not  susceptible  to  any  such  artificial  reme- 
dies. 

In  fact,  bank-guaranty  philosophy  makes  no  preten- 
sions to  cure  panics  in  any  such  way.  Lack  of  confidence  is 
the  formula  which  sums  up  the  diagnosis  of  this  theory.  In 
considering  this  phase  of  the  subject  much  confusion  may 
be  avoided  by  distinguishing  between  a  "run"  on  a  bank 
and  a  panic  or  financial  crisis.  A  run  on  a  bank  may  occur 
when  general  credit  conditions  are  normal  and  healthy,  the 
depositors  having  become  frightened  by  a  rumor  that  their 
particular  bank  is  insolvent.  The  trouble  is  generally 
caused  by  depositors  whose  bank  account  represents  sav- 
ings. The  cause  of  such  a  run  is  simply  a  lack  of  confidence, 
the  depositor  fearing  that  all  or  a  part  of  his  deposit  will  be 
lost.  It  is  easy  to  see  what  effect  a  guaranty  law  would 
have  on  such  a  situation.  Over  eighty  banks  have  failed  in 
the  various  states  with  guaranty  laws,  and  in  no  case  was 
there  anything  which  resembled  alarm  on  the  part  of  de- 
positors. If  there  is  one  thing  that  stands  out  above  all 
others,  it  is  that  the  operation  of  the  guaranty  laws  as- 
sures a  banker  that  he  can  go  home  at  night  and  sleep, 
knowing  that  his  institution  will  not  be  besieged  the  next 
day  by  his  depositors. 

But  a  panic,  or  what  is  better  known  as  a  financial 
crisis,  is  a  very  different  matter.  "Every  experienced  man 
of  affairs  knows  that  the  material  for  a  financial  catastro- 
phe is  collected  by  previous  years  of  extravagance,  over- 


182    THE  GUARANTY  OF  BANK  DEPOSITS 

trading,  and  expansion  of  credit;  and  that  it  is  only  an 
accident  whether  it  is  this  or  that  event  which  touches  off 
the  powder  magazine." 1  It  has  already  been  indicated  how 
a  bank  may  support  a  very  heavy  deposit-credit  by  means 
of  the  check  system  and  a  skillful  marshaling  of  its  assets. 
Since  bank  credit  is  called  into  existence  largely  by  the 
granting  of  loans  its  fluctuations  serve  as  an  indicator  of 
business  activity.  A  period  of  prosperity  is  characterized 
by  a  certain  business  exhilaration;  business  begets  busi- 
ness, and  when  the  whole  industrial  organization  is  throb- 
bing with  energy  the  credit  system  is  subjected  to  a  severe 
strain.  Credit  is  healthy  only  when  the  purposes  for  which 
it  was  extended  ripen  into  utilities  that  will  liquidate  the 
loan.  The  great  danger  of  a  period  such  as  we  are  consider- 
ing is  that  the  confidence  of  enterprisers  will  develop  into 
recklessness,  with  the  result  that  when  the  day  arrives  for 
the  realization  of  their  dreams  it  will  be  revealed  that  they 
have  overreached  themselves.  It  is  evident  that  a  suffi- 
cient number  of  these  failures  will  carry  down  with  them 
the  financial  institutions  that  have  been  backing  them  with 
credit.  Because  of  the  interdependence  of  modern  financial 
institutions  the  shock  of  a  few  large  failures  may  be  felt 
throughout  the  country.  With  credit  over-extended  the 
law  of  self-preservation  becomes  the  first  law  of  banks,  and 
the  temporary  inability  of  banks  in  financial  centers  to 
give  assistance  to  their  correspondents  precipitates  a 
temporary  paralysis  throughout  the  whole  credit  system. 
Such  is  the  disease  to  which  bank  guaranty  addresses 
itself  as  a  cure.  Deposits,  as  already  indicated,  represent 
either  the  actual  deposit  of  money  or  the  creation  of  loans. 
Oklahoma  gives  conclusive  proof  that  a  guaranty  law  will 
prevent  a  run  on  the  former  kind  of  deposits,  because  it 
overcomes  the  lack  of  confidence  on  the  part  of  the  public 
that  such  deposits  will  be  lost.  But  when  it  comes  to  de- 
posits created  by  loans  lack  of  confidence  has  not  so  much 
1  J.  Laurence  Laughlin,  Banking  Progress,  p.  95. 


THE  EFFECTS  OF  THE  LAWS  183 

to  do  with  the  case.  Here  the  great  harm  is  done  when 
credit  is  cut  off,  resulting  in  the  prostration  of  business. 
These  deposits  do  not  represent  surplus  savings  that  can 
wait;  they  represent  loans  to  business  men  who  want  their 
money  or  its  equivalent  at  very  definite  times  to  meet 
their  obligations.  Bank  guaranty  might  meet  this  situa- 
tion in  either  or  both  of  two  ways.  One  would  be  to  main- 
tain a  fund  sufficiently  large  that  the  credit  of  banks  would 
be  saved  from  a  collapse;  the  other  would  be  the  possibility 
that  in  a  time  of  crisis,  if  all  deposits  were  guaranteed,  the 
public  could  temporarily  use  bank  checks  as  a  kind  of  cur- 
rency, and  thus  obviate,  for  the  time  being,  the  necessity 
of  presenting  them  for  payment.  Let  us  consider  these 
propositions. 

Since  bank  guaranty  professedly  makes  no  attempt  to 
remove  the  causes  of  financial  crises,  it  might  stop  them  by 
maintaining  a  fund  sufficiently  large  to  prevent  a  break 
after  the  storm  has  gathered.  The  problem  is  not  only  that 
of  meeting  the  losses  occasioned  by  insolvent  banks,  but 
also  of  making  instantly  available  the  temporarily  para- 
lyzed credit  of  all  banks.  Obviously  a  fund  to  accomplish 
this  must  be  very  large.  Assuming  that  such  a  fund  were 
thirty-three  cents  on  the  dollar,  in  1911  in  Oklahoma  it 
would  have  amounted  to  $18,000,000  or  nearly  twice  the 
total  capital  stock  of  the  banks.  Oklahoma  has  plainly 
shown  that  the  fund  cannot  be  much  less  than  this,  for 
there  it  was  attempted  to  accumulate  a  fund  equal  to  five 
per  cent  of  deposits  and  a  few  bank  failures  wiped  it  out  of 
existence  in  a  few  months.  It  is  also  patent  that  in  a  time 
of  financial  panic  interest-bearing  certificates  could  not  be 
used  with  which  to  borrow  money  to  avert  the  crisis.  In  a 
financial  crisis  currency  is  at  a  premium  and  nearly  every 
one  is  hysterically  trying  to  borrow,  not  lend.  Conse- 
quently, it  is  plain  that  it  would  be  impossible  to  borrow 
money  on  the  gigantic  scale  that  would  be  necessary. 
Bank  guaranty  as  a  panic  preventive  by  amassing  a  fund 


184    THE  GUARANTY  OF  BANK  DEPOSITS 

to  galvanize  the  temporary  paralysis  of  credit  is  chimerical, 
because  a  fund  sufficient  to  meet  commercial  deposits 
would  take  all  the  money  out  of  circulation;  and  if  such  a 
fund  could  be  amassed  the  banks  could  not  afford  it. 
Texas,  Nebraska,  and  South  Dakota  are  collecting  modest 
funds  with  which  they  expect  to  pay  depositors  at  once.  If 
they  succeed  in  preventing  a  concentration  of  loss  they 
will  probably  be  able  to  pay  depositors  at  once,  but  in  a 
time  of  panic  and  a  universal  suspension  of  credit  such 
funds  will  go  but  a  short  way.  Kansas,  Mississippi,  and 
Washington  have  given  up  the  panic-cure  idea  altogether 
and  only  attempt  ultimate  payment. 

There  yet  remains  the  second  consideration,  namely, 
that  if  all  deposits  were  guaranteed,  the  public,  in  a  time  of 
crisis  when  checks  temporarily  could  not  be  honored  at 
banks,  would  find  a  use  for  checks  by  passing  them  from 
hand  to  hand,  thus  obviating,  for  the  time  being,  the  neces- 
sity of  presenting  them  for  payment.  To  the  extent  that 
this  would  be  possible  bank  guaranty,  while  not  a  panic 
cure,  would  be  at  least  a  valuable  palliative.  It  is  difficult 
to  foretell  to  what  an  extent  such  a  practice  might  develop. 
The  great  obstacle  to  be  overcome  is  the  fact  that  checks 
by  custom  have  a  restricted  circulation  and  are  almost 
immediately  presented  for  payment.  The  reason  for  this 
restricted  circulation  is  not  only  the  uncertainty  as  to 
whether  the  bank  can  honor  the  check,  but  more  particu- 
larly the  uncertainty  as  to  the  genuineness  of  the  check 
and  the  further  uncertainty  as  to  whether  the  drawer  has, 
and  how  long  he  will  have,  a  deposit  in  the  bank  to  cover  it. 
Crises  are  so  widely  separated  and  of  such  short  duration 
that  this  customary  use  of  checks  would  with  difficulty  be 
broken  down  quickly  enough  to  give  much  relief.  How- 
ever, in  every  community  there  are  individuals  and  busi- 
ness firms  that  have  a  recognized  standing  and  credit,  and 
where  these  firms  mail  out  their  checks  and  it  becomes  a 
question  for  the  time  being  of  receiving  payment  in  this 


THE  EFFECTS  OF  THE  LAWS  185 

form  or  nothing,  their  creditors  could  probably  make  these 
checks  circulate  temporarily. 

4.  Conservative  bankers  watching  the  reckless.  One  of  the 
fascinating  arguments  for  bank  guaranty  was  that,  if  all 
banks  were  required  to  contribute  toward  a  fund  with 
which  to  meet  losses,  the  honest  and  conservative  bankers 
would  keep  a  watch  on  the  reckless  and  dishonest,  and  that 
this  inside  pressure  would  force  the  rascals  out  of  business. 
The  advocates  of  the  scheme  maintained  that  the  banking 
system  would  become  self-regulating  and  thus  relieve  the 
state  of  many  perplexing  problems.  Here  again  they  seem 
to  have  reckoned  without  the  host.  Practically  every  fail- 
ure in  Oklahoma,  Texas,  and  Kansas  has  been  caused  by 
incompetency  or  dishonesty,  and  there  is  not  a  case  on 
record  where  another  banker  has  raised  his  finger  against 
the  proceedings.  Norton  and  his  associates  increased  the 
deposits  of  the  Columbia  Bank  and  Trust  Company  about 
seven  hundred  per  cent  in  less  than  a  year,  yet  not  a  banker 
of  the  state  raised  a  whimper.  When  this  bank  went  down 
it  was  the  immediate  cause  of  two  other  failures,  yet  the 
officials  of  these  two  banks  let  Norton  and  his  associates 
continue  on  their  mad  career  without  even  registering  a 
protest.  It  would  be  hard  to  imagine  a  more  spectacular 
piece  of  dishonest  banking  than  the  attempt  of  Abner 
Davis  to  finance  the  Putnam  City  project  with  the  funds 
of  the  Night  and  Day  Bank.  Governor  Haskell,  the  chair- 
man of  the  state  banking  board,  knew  of  it,  and  it  is  cer- 
tain that  the  well-informed  bankers  of  Oklahoma  City 
understood  what  was  going  on;  yet  there  was  no  protest. 
J.  S.  Spotts,  the  principal  owner  of  the  defunct  First  State 
Bank  of  Kopperl,  Texas,  had  already  served  a  term  in  the 
United  States  penitentiary  for  tke  violation  of  the  na- 
tional banking  laws,  but  he  encountered  no  opposition 
from  his  fellow-bankers  in  reenteriog  the  banking  business 
in  Texas.  Flack,  the  wrecker  ot  the  Abilene  Bank,  Kansas, 


186    THE  GUARANTY  OF  BANK  DEPOSITS 

was  one  of  the  most  popular  bankers  in  Kansas,  and  he 
was  out  of  the  state  two  weeks  before  his  associates  real- 
ized what  he  had  done.  The  other  failures  in  Oklahoma 
and  Texas  are  in  the  main  but  a  repetition  of  this  same 
story. 

But,  after  all,  the  apparent  breakdown  of  this  theory  is 
not  to  be  caviled  at.  There  is  no  disputing  the  fact  that 
under  compulsory  deposit  insurance  it  is  to  the  interest  of 
the  careful  bankers  to  have  the  reckless  and  the  incompe- 
tent eliminated.  This  fact  is  self-evident;  where  the  bank- 
guaranty  theorists  went  astray  was  in  thinking  that  the 
proposition  would  work  itself  out  through  a  system  of 
espionage.  In  the  field  of  labor  legislation  there  is  a  curious 
case  where  this  same  idea  was  given  a  trial.  The  Industrial 
Revolution  caused  the  problem  of  industrial  accidents  to 
assume  new  proportions.  The  following  quotation  shows 
how  it  was  proposed  to  meet  this  new  problem  by  an  un- 
flinching application  of  the  fellow-servant  doctrine:  "But 
it  is  an  essential  part  of  the  old  theory  [common-law  doc- 
trine], that  an  unsparing  application  of  the  fellow-servant 
doctrine  will  force  employees  to  exercise  a  ceaseless  sur- 
veillance over  one  another,  and  thus  reduce  the  number  of 
accidents  to  a  minimum."  *  This  part  of  the  general  fel- 
low-servant doctrine  was  that  by  refusing  the  victim  dam- 
ages when  his  injury  was  caused  by  a  fellow-servant,  each 
laborer  would  watch  that  his  fellow-laborers  did  not  be- 
come careless  and  reckless.  We  now  know  how  fantastic  it 
was  to  suppose  that  the  great  problem  of  reducing  indus- 
trial accidents  could  be  solved  by  inside  pressure  of  this 
kind.  Looking  back  over  a  hundred  years  we  now  see  that 
the  pressure  was  exerted  on  the  state,  and  the  state  brought 
relief  by  enforcing  the  adoption  of  safety  appliances, 
guards  for  machinery,  the  principle  of  employers'  liability, 
and  other  such  remedial  measures.  So  with  bank  guaranty. 
After  studying  more  than  eighty  bank  failures  in  the  vari- 
1  Adams  and  Sumner,  Labor  Problems,  p.  482. 


THE  EFFECTS  OF  THE  LAWS  187 

ous  states  it  almost  provokes  a  smile  when  it  is  recalled 
how  the  propagandists  of  1908  expected  to  eliminate  bad 
banking  by  having  the  conservative  bankers  keep  their 
eye  on  the  reckless.  In  justice  it  must  be  said  that  there 
was  an  element  of  truth  in  the  theory,  only  it  worked  out 
hi  practice  quite  differently  from  what  had  been  planned 
for  the  simple  reason  that  the  practice  of  spying  on  others 
is  repugnant  to  the  ordinary  man.  When  the  assessments 
in  Oklahoma  in  1911  reached  on  an  average  over  six  per 
cent  of  capital  stock,  the  bankers,  instead  of  individually 
watching  each  other,  brought  such  pressure  to  bear  on  the 
state  administration  that  the  politicians  were  forced  off 
the  state  banking  board  and  the  bankers  themselves  took 
over  the  supervision  of  banks.  Thus,  instead  of  a  system  of 
private  espionage,  the  bankers  took  over  a  publicly  con- 
stituted board  whose  duties  were  to  pry  into  the  affairs  of 
each  bank.  So  in  earnest  were  the  bankers  that  they  have 
organized  a  banking  supervision,  which  for  efficiency  and 
watchfulness  is  probably  not  surpassed  in  the  United 
States. 

5.  Bank  guaranty  03  a  promoter  of  reckless  banking.  One 
of  the  most  effective  arguments  produced  was  that  bank 
guaranty  would  wreck  any  banking  system  because  it 
made  all  banks  equally  safe  in  the  eyes  of  the  public.  Free 
banking  is  based  on  the  theory  that  the  asset  which  draws 
business  to  a  bank  is  its  reputation  for  foresight,  prudence, 
and  care  in  handling  funds.  The  depositor,  realizing  his 
risk,  seeks  conservative  banks,  and  the  banks  in  order  to 
get  business  are  constrained  to  careful  methods.  Now 
bank  guaranty  comes  along  and  reverses  this  theory.  The 
depositor  no  longer  seeks  the  safest  bank,  but  the  bank  that 
will  give  him  the  most  liberal  terms.  It  was  argued  that 
the  wild-cat  banking  that  would  ensue  would  plunge  the 
whole  banking  system  into  ruin. 

Before  this  proposition  can  be  effectively  discussed  a 


188   THE  GUARANTY  OF  BANK  DEPOSITS 

more  scientific  statement  of  the  case  must  be  made.  It 
must  be  remembered  that  this  is  a  matter  of  insurance,  and, 
in  terms  of  insurance,  this  contention  that  the  wild-cat 
banking  engendered  by  such  a  law  would  plunge  the  whole 
banking  system  into  ruin  is  simply  a  statement  that  the 
"moral  hazard"  of  this  insurance  will,  from  the  very  na- 
ture of  the  case,  defeat  the  insurance. 

In  order  to  consider  this  question  more  advantageously  a 
broader  view  of  the  insurance  field  must  be  taken  that  we 
may  be  enabled  to  understand  more  fully  this  "  moral- 
hazard"  element.  It  is  well  known  that  some  men  will 
commit  suicide  in  order  that  some  one  else  may  get  their 
life  insurance.  If  the  moral  hazard  in  fire  insurance  had  not 
been  controlled  it  is  probable  that  fire  insurance  would  have 
proved  the  world's  greatest  game  of  swindle.  It  costs 
society  heavily  to  control  this  moral  hazard,  but  fire  .in- 
surance fills  such  a  long-felt  need  that  the  benefits  far  out- 
weigh the  costs.  Consequently,  fire  insurance  companies 
will  indemnify  only  actual  loss,  and  often  they  insert  the 
so-called  three-fourths  value  clause  which  further  restricts 
the  amount  that  may  be  collected  on  any  loss.  There  are 
many  other  devices  designed  for  this  same  general  purpose, 
but  enough  has  been  said  to  indicate  the  necessity  of  these 
safeguards.  In  sick  insurance  we  have  malingering;  in  ac- 
cident insurance,  self-inflicted  injury;  while  in  insurance 
against  unemployment,  simulation  must  be  guarded  at 
every  turn.  Not  only  is  there  this  hazard  due  to  the  moral 
obliquity  of  the  party  insured,  but  there  is  also  that  inevit- 
able relaxation  of  vigilance  which  is  present  in  all  kinds  of 
insurance.  These  tendencies  must  be  curbed  or  insurance, 
becoming  corrupt,  will  degenerate  into  a  means  of  exploita- 
tion. 

But  while  there  is  always  the  tendency  to  use  insurance 
for  private  advantage,  there  are  certain  social  forces  which 
insurance  sets  at  work  that  have  a  countervailing  effect. 
I.  M.  Rubinow  states  this  fact  as  follows: 


THE  EFFECTS  OF  THE  LAWS  189 

Whether  it  be  prevention  of  crime,  disease,  accident,  or  fire,  or 
any  other  hazard,  it  is  through  social  effort  that  substantial  results 
have  been  obtained  within  recent  years.  It  is  in  efficient  police 
protection  and  not  individual  prudence  in  staying  home  after 
dark  that  we  put  our  hopes  of  safety.  Regulation  of  dangerous 
processes,  measures  of  public  health,  a  sound  employment  policy, 
fire  regulations  —  these  are  all  social  forces  upon  which  we  de- 
pend to  make  for  a  prevention  of  hazard,  for  a  safer  life.  .  .  .  But  as 
to  the  preventive  work  carried  on  because  of  insurance  there  can 
be  no  doubt.  Fire  insurance  has  resulted  in  stricter  building  laws, 
in  better  fire-extinguishing  facilities,  in  development  of  automatic 
sprinklers;  compensation  insurance  has  given  a  tremendous 
stimulus  to  better  industrial  safety;  health  insurance  in  Europe 
has  stimulated  better  care  of  the  sick  and  convalescent  (which,  of 
course,  is  truly  preventive  work),  and  unemployment  insurance 
has  stimulated  better  provision  for  public  employment  offices.1 

Bank-deposit  insurance  will  have  a  tendency  to  relax  the 
vigilance  of  the  depositing  public.  But  this  is  of  little  con- 
sequence. The  theory  assumes  that  the  public  has  perfect 
knowledge  of  all  the  complex  ramifications  of  the  modern 
banking  business,  and  consequently  can  govern  itself 
accordingly.  It  has  been  pointed  out  repeatedly  that  this 
is  far  from  the  truth.  The  truth  is  that  the  average  deposi- 
tor knows  very  little  regarding  the  operation  of  the  modern 
bank,  and  that  effective  state  supervision  is  now  the  great 
palladium  of  public  safety. 

But  there  yet  remains  the  contention  that  under  a  guar- 
anty law  a  reputation  for  foresight  and  prudence  in  han- 
dling funds  has  lost  most  of  its  significance  to  a  banker  as 
a  business-getter.  Ancillary  to  this  is  the  inference  that 
a  reckless  straining  after  abnormal  profits  will  tend  to 
replace  conservative  banking.  This  is  one  phase  of  the 
moral  hazard  of  this  insurance.  The  attempt  will  now  be 
made  to  ascertain  whether  the  practice  comports  with  this 
theory,  and  to  what  extent  the  operation  of  the  laws  tends 
to  set  in  motion  social  forces  that  counteract  this  moral 
hazard. 

1  The  AVic  Republic.  July  «7,  1918.  pp.  365-66. 


190    THE  GUARANTY  OF  BANK  DEPOSITS 

The  evidence  which  we  gather  from  the  seven  states  is 
conflicting  on  this  point.  In  Oklahoma  the  most  positive 
results  have  been  obtained.  There  it  has  been  seen  that 
\  the  deposits  of  the  state  banks  doubled  the  first  year. 
There  is  no  evidence  to  show  that  the  public  used  any 
great  discrimination  in  choosing  banks.  It  was  pretty  well 
known  that  the  officers  of  the  Columbia  Bank  and  Trust 
Company  were  speculating  in  the  oil  business,  yet  in  the 
face  of  this  knowledge  the  extra-liberal  policy  of  this  bank 
increased  its  deposits  at  a  rate  which  has  few  parallels  in 
American  banking.  Neither  is  this  an  isolated  case,  for 
the  other  banks  both  good  and  bad  received  their  full  share 
of  deposits.  Another  fact  which  shows  the  indiscriminate 
use  of  banks  is  that  in  the  first  two  years  of  the  operation  of 
the  Oklahoma  law,  138  new  state  banks  were  organized. 
It  is  obvious  that  these  new  banks  had  no  reputation  that 
would  attract  deposits,  yet  these  new  banks  thrived  won- 
derfully even  in  communities  where  the  competition  of  the 
older  institutions  was  strong.  This  condition,  coupled  with 
lax  enforcement  of  the  general  banking  laws,  gave  every 
incentive  to  speculative  banking.  The  lurid  banking  experi- 
ences that  followed  indicate  that  the  speculator  had  not 
failed  to  take  advantage  of  his  opportunity. 

On  the  other  hand,  the  facts  which  the  other  states  pre- 
sent are  quite  different.  In  Kansas  the  law  has  so  little 
affected  the  public  mind  that  only  a  little  over  a  half  of  the 
banks  have  found  it  desirable  to  guarantee  their  deposits. 
It  has  been  the  large,  well-established  banks  that  have 
entered  the  system,  and  so  far  they  are  giving  little  evi- 
dence of  decay.  Nebraska  has  a  compulsory  law  which 
apparently  is  attracting  deposits.  But  there  is  conclusive 
evidence  at  hand  that  this  is  not  destroying  the  moral  fiber 
of  the  bankers.  Nebraska  and  South  Dakota  are  neighbor- 
states  with  much  the  same  kind  of  people,  economic  life, 
etc.,  yet  from  1910  to  1914  South  Dakota  with  no  guaranty 
law  in  operation  had  fourteen  bank  failures,  while  Nebraska 


THE  EFFECTS  OF  THE  LAWS  191 

with  a  very  effective  guaranty  law  had  only  two.  In  the 
same  time  two  national  banks  have  failed  in  Nebraska,  and 
these  national  failures  have  revealed  far  worse  banking 
than  the  two  state-bank  failures.  Texas  has  had  some  bank 
failures  of  a  very  questionable  nature,  but  in  this  state  the 
problem  is  complicated  by  the  sudden  growth  of  the  state 
banking  system  since  1904.  In  the  first  ten  years  about 
eight  hundred  new  banks  were  organized,  and  since  in  most 
cases  the  officers  of  these  banks  were  inexperienced  men  it  is 
evident  that  the  guaranty  law  cannot  be  held  responsible 
for  any  large  part  of  the  failures  in  that  state. 

Oklahoma,  therefore,  seems  to  be  the  only  state  where 
we  are  sure  the  law  has  had  a  tendency  to  stimulate  bad 
banking.  The  explanation  of  this  is  not  far  to  seek.  Here 
every  circumstance  encouraged  the  abuse  of  the  law.  The 
law  was  passed  a  few  weeks  after  the  panic,  as  a  panic  cure. 
This  centered  the  attention  of  the  public  on  the  state  banks. 
The  presidential  campaign  of  the  following  year  further 
advertised  the  experiment.  The  result  was  a  great  rush  of 
deposits  to  the  guaranteed  banks.  The  initial  law  was 
extremely  crude  and  for  a  number  of  years  it  was  blunder- 
ingly administered.  Oklahoma  was  experiencing  a  boom 
and  the  lax  enforcement  of  the  banking  laws  made  the  state 
a  haven  for  speculative  banking.  In  the  beginning  every 
other  consideration  was  subordinated  to  that  of  making 
the  law  popular.  Not  realizing  that  any  insurance  proposi- 
tion will  degenerate  into  a  swindle  when  not  properly 
guarded,  free  rein  for  a  time  was  given  to  all  who  wished  to 
exploit  the  law.  The  exemplary  punishment  which  this 
state  received  was  the  logical  and  ineluctable  consequence 
of  this  purblind  folly.  In  the  three  other  states  where  the 
laws  have  been  in  operation  for  any  length  of  time  very 
different  conditions  are  found.  The  laws  were  passed 
nearly  two  years  after  the  panic  with  the  result  that  the 
public  was  much  less  affected.  In  these  three  states  eco- 
nomic conditions  were  much  more  settled,  and  the  banking 


192    THE  GUARANTY  OF  BANK  DEPOSITS 

systems  were  on  a  higher  plane.  In  addition  to  this  every 
effort  was  made  to  guard  against  the  abuse  of  the  laws. 
Under  these  changed  conditions  bank  guaranty  seems  to 
have  had  no  deleterious  effect  on  the  morale  of  the  banking 
profession.  Too  much,  therefore,  should  not  be  made  of 
the  Oklahoma  case,  for  if  there  had  been  no  guaranty  law 
the  course  of  events  in  that  state  for  a  number  of  years 
must  have  been  lamentable  under  any  conditions. 

In  closing  the  discussion  of  this  question  one  significant 
fact  must  be  reemphasized.  While  it  is  true  that  insurance 
relaxes  the  vigilance  of  the  party  insured,  it  is  also  true  that 
it  sets  in  operation  powerful  social  forces  working  in  the 
opposite  direction.  Thus,  paradoxical  as  it  may  seem,  fire 
insurance  is  probably  the  most  potent  factor  in  the  world 
working  toward  fire  prevention.  It  is  extremely  significant 
that  the  same  principle  is  found  operating  in  bank-deposit 
insurance.  Every  state  that  has  adopted  such  laws  has  at 
the  same  time  raised  its  banking  standards.  Ten  years  ago 
Oklahoma  had  about  the  lowest  banking  standards  in  the 
country;  to-day,  almost  wholly  because  of  the  pressure  of 
the  guaranty  law  on  the  state  bankers,  no  state  in  the 
Union  probably  has  better  regulated  state  banks. 

6.  The  injustice  of  bank-guaranty  laws.  An  objection 
closely  akin  to  the  one  we  have  been  considering  is  that  of 
the  injustice  of  such  legislation.  It  was  at  this  point  that 
the  banker  was  most  sensitive  and  for  that  reason  his  point 
of  view  will  be  presented  first.  The  ordinary  banker  looks 
upon  his  bank  first  of  all  as  a  source  of  profit.  These 
profits  are  closely  related  to  the  size  of  his  deposit  accounts, 
for  it  is  these  deposits  that  give  him  lending  power.  The 
success  of  the  bank  depends,  therefore,  largely  on  the  per- 
sonality and  the  driving  power  of  the  banker.  This  natu- 
rally makes  him  individualistic,  and  like  other  professional 
and  business  men  he  has  a  tendency  to  approach  broad 
questions  of  policy  from  the  standpoint  of  his  own  restricted 


THE  EFFECTS  OF  THE  LAWS  193 

business  interest.  Free  banking  has  existed  in  this  coun- 
try for  nearly  a  century,  and  generations  of  bankers  have 
inherited  its  extreme  individualistic  tendencies.  Having 
become  accustomed  to  this  state  of  affairs,  the  underlying 
principles  of  bank  guaranty  would  naturally  be  repugnant 
to  the  ordinary  banker.  Mr.  James  B.  Forgan,  the  suc- 
cessful Chicago  banker,  said  more  than  ten  years  ago : 

Is  there  anything  in  the  relations  existing  between  banks  and 
their  customers  to  justify  the  proposition  that  in  the  banking 
business  the  good  should  be  taxed  to  pay  for  the  bad;  ability 
taxed  to  pay  for  incompetency;  honesty  taxed  to  pay  for  dis- 
honesty; experience  and  training  taxed  to  pay  for  the  errors  of  in- 
experience and  lack  of  training;  and  knowledge  taxed  to  pay  for 
the  mistakes  of  ignorance?  l 

Sentiment  such  as  this  met  a  prompt  response  from 
many  strong  bankers.  The  bank-guaranty  specter  threat- 
ened to  turn  suddenly  into  an  empty  satisfaction  the  sur- 
plus which  had  been  laboriously  accumulated  to  give  the 
bank  prestige  and  the  goodwill  which  years  of  courteous 
and  conscientious  banking  had  built  up.  But  this  is  not 
all.  The  law  would  proceed  to  take  the  assets  of  this  banker 
to  pay  the  debts  of  the  banker  who  with  his  extravagant 
promises  had  taken  away  the  business  of  the  more  con- 
scientious banker.  The  better  class  of  bankers  considered 
this  an  outrage  as  great  as  if  the  law  should  require  all 
reputable  physicians  to  contribute  toward  a  fund  to  be 
used  to  repair  the  damage  done  by  physicians  who  engage 
in  illegal  practices.  It  was  this  feeling  of  the  injustice  of 
bank  guaranty  that  made  it  the  most  bitter  of  banking 
discussions. 

In  sharp  contrast  to  this  rather  extreme  position  is  the 
point  of  view  of  society.  As  viewed  by  society,  the  per- 
sonal element  in  banking  falls  into  the  background,  and 
the  institution  of  banking  is  considered  solely  in  its  relation 
to  the  productive  process  by  which  society  is  sustained. 

1  Guaranty  of  National  Bank  Deposits  (pamphlet),  p.  3. 


194    THE  GUARANTY  OF  BANK  DEPOSITS 

This  point  of  view  is  as  impersonal  as  the  other  is  personal, 
and  its  chief  consideration  is  whether  the  benefits  of  such  a 
law  more  than  balance  its  costs.  These  antipodal  views 
mark  the  boundaries  of  any  discussion  of  this  question. 

The  injustice  of  bank  guaranty  can  best  be  considered 
by  separating  the  proposition  into  two  parts.  In  the  first 
place,  it  is  argued  that  such  a  law  is  unjust  in  that  it  places 
all  bankers  on  the  same  level  and  thus  turns  to  naught  all 
of  those  qualities  that  are  supposed  to  attract  deposits. 
But  it  is  plain  that  such  a  consideration  must  not  be 
pressed  too  far.  A  banker's  reputation  for  honesty  and 
prudence  in  handling  funds  would  naturally  be  most  con- 
spicuous and  would  get  its  fullest  reward  under  a  condition 
where  the  public  suffered  the  most  from  corrupt  banking. 
As  banking  supervision  is  made  more  strict  it  tends  to 
bring  all  bankers  to  an  equality  in  this  respect.  An  ideal 
banking  system  would  be  one  in  which  the  supervision  was 
so  efficient  as  to  preclude  absolutely  the  possibility  of  loss. 
But  it  is  plain  that  in  such  a  case  bankers  would  be  on  the 
same  equality  as  under  a  guaranty  law.  This  argument 
carried  too  far  would  condemn  banking  regulations  in 
general,  and  thus  run  counter  to  the  interests  of  society. 

The  operation  of  the  laws  has  shown  that  this  contention 
was  one-sided  in  that  it  overlooked  certain  important 
banking  customs  and  habits.  It  is  a  well-known  fact  that 
most  depositors  of  banks  are  at  some  time  likely  also  to  be 
borrowers.  Consequently,  people  naturally  deposit  with 
the  bank  where  they  are  best  known.  In  this  way  the  in- 
fluence of  each  bank  through  its  officers  and  friends  reaches 
out  in  all  directions  and  controls  its  own  group  of  deposi- 
tors. The  fact  that  over  two  thirds  of  all  the  deposits  in 
Oklahoma  are  in  the  unguaranteed  national  banks  shows 
that  this  is  a  deep-moving  force  that  the  guaranty  law  has 
little  affected.  This  undoubtedly  explains  in  large  part 
why  the  guaranty  laws  have  not  attracted  deposits  to  the 
extent  that  their  proponents  predicted. 


THE  EFFECTS  OF  THE  LAWS  195 

In  this  connection  it  should  also  be  pointed  out  that  a 
guaranty  law  does  not  really  put  all  bankers  on  an  equal- 
ity. It  undoubtedly  has  a  tendency  to  put  banks  on  the 
same  footing  as  regards  attracting  deposits,  but  in  all 
other  ways  the  field  of  individual  initiative  is  left  wide 
open.  The  banker  who  most  successfully  eliminates  waste 
in  the  operation  of  his  plant,  and  the  banker  who  makes 
the  fewest  bad  loans,  will  be  rewarded  with  larger  divi- 
dends. This  fact  seems  worthy  of  notice,  for  the  phrase 
"all  banks  on  the  same  level"  is  apt  to  be  misleading. 

The  second  part  of  this  injustice  indictment  is  that  good 
banks  are  taxed  to  help  pay  the  debts  of  the  bad.  Assum- 
ing that  bank  failures  will  occur,  even  under  the  most  effi- 
cient supervision,  the  question  is  whether  there  can  be  any 
justification  for  compelling  the  remaining  banks  to  make 
good  losses  in  which  they  had  no  part.  It  is  a  question  of 
public  policy  rather  than  that  of  facts  disclosed  by  the 
operation  of  the  laws,  and  for  this  reason  all  that  can  be 
attempted  is  to  present  some  of  the  various  aspects  of  the 
issues  involved. 

The  first  approach  to  the  discussion  of  this  question  must 
lie  in  a  modification  of  the  extreme  individualistic  view 
that  one  bank  has  no  interest  in  its  fellow-banks'  activi- 
ties. This  age  has  been  aptly  described  as  an  "age  of  asso- 
ciated effort  and  associated  responsibility,"  and  the  bank- 
ing business  has  long  been  recognized  as  one  peculiarly 
affected  with  a  public  interest.  In  the  celebrated  case  of 
Munn  r.  Illinois  *  Chief  Justice  Waite  said: 

Property  does  become  clothed  with  a  public  interest  when  used 
in  a  manner  to  make  it  of  public  consequence,  and  affect  the  com- 
munity at  large.  When,  therefore,  one  devotes  his  property  to  a 
use  in  which  the  public  has  an  interest,  he,  in  effect,  grants  to  the 
public  an  interest  in  that  use,  and  must  submit  to  be  controlled  by 
the  public  for  the  common  good,  to  the  extent  of  the  interest  he  has 
thus  created.  He  may  withdraw  his  grant  by  discontinuing  the 

1  24  Uw  Ed..  77.  84. 


196    THE  GUARANTY  OF  BANK  DEPOSITS 

use;  but,  so  long  as  he  maintains  the  use,  he  must  submit  to  the 
control. 

In  conformity  with  the  political  philosophy  of  the  fore- 
going quotation  banks  in  this  country  have  long  been  sub- 
jected to  special  regulations.  But  prior  to  the  guaranty 
laws  these  regulations  have  been  of  such  a  nature  as  to  at- 
tempt to  enforce  the  individual  responsibility  of  each  bank 
to  its  own  customers.  Legislatures  have  apparently  not 
considered  such  regulations  adequate  protection  to  the 
public,  and  by  the  enactment  of  bank-guaranty  laws  they 
have  compelled  the  banks  to  accept  associated  responsibil- 
ity for  certain  of  the  dangers  incident  to  their  business. 
The  question  is  whether  the  legislatures  by  so  doing  have 
done  a  gross  injustice  as  between  banks.  Freund  in  his 
"Police  Power"  l  has  the  following  significant  sentences 
regarding  the  constitutionality  of  compulsory  sickness  and 
old-age  insurance: 

Should  the  law  undertake  to  create  an  indemnity  fund  from 
compulsory  contributions  of  all  those  whose  business  or  property 
occasions  the  loss  to  be  provided  against,  there  would  be  some- 
thing analogous  to  an  employers'  liability  insurance.  The  objec- 
tions to  such  a  system  would  be  that  an  individual  would  be  forced 
to  share  in  making  good  a  loss  with  which  in  a  particular  case  he 
had  no  connection,  and  although  he  took  the  utmost  precaution 
to  avoid  such  loss  so  far  as  the  management  of  his  own  property 
was  concerned.  But  the  objection  is  not  conclusive.  The  con- 
trolling consideration  is  the  existence  of  a  risk  or  danger,  which 
the  police  power  may  seek  to  minimize;  and  it  is  reasonable  that 
those  who  create  or  maintain  the  risk  or  danger  for  their  own 
benefit  should  consent  to  the  most  effectual  means  of  obviating 
its  harmful  consequences;  and  collective  responsibility  is  a  wise 
and  conservative  method  of  meeting  the  risk,  and  its  imposition 
should  be  allowed  as  a  valid  condition  of  the  right  of  keeping  a 
dangerous  instrument. 

There  is  another  line  of  approach  to  this  question  of 
justice.  If  a  guaranty  law  increases  a  bank's  deposits  it  is 
evident  that  this  will  be  at  least  a  partial  compensation. 
1  Page  460. 


THE  EFFECTS  OF  THE  LAWS  197 

As  a  matter  of  fact,  it  is  found  that  deposits  have  been 
noticeably  increased  in  some  cases,  while  in  others  the  in- 
fluence of  the  laws  has  been  almost  negligible.  It  may  also 
be  that  in  reality  there  has  been  no  burden,  since  the  banks 
may  have  shifted  it  on  to  the  public.1  No  banker  will  ad- 
mit that  such  a  thing  is  possible.  His  assessments  are  a 
very  painful  reality,  and  if  he  in  turn  recoups  his  losses 
from  some  source  the  operation  is  so  obscure  and  compli- 
cated that  he  is  unconscious  of  what  is  taking  place.  In  the 
short  space  of  twenty-five  years  Oklahoma  has  been  trans- 
formed from  a  wild  prairie  to  a  civilized  state.  As  already 
indicated  a  gradual  decline  in  the  interest  rate  accompa- 
nies such  a  transformation.  Bearing  in  mind  the  subtleties 
of  tax-shifting  it  seems  unthinkable  that  the  onerous  guar- 
anty assessments  have  not  to  some  extent  retarded  this 
decline,  yet  few  bankers  realize  what  may  have  been  taking 
place.  The  extent  to  which  a  guaranty  law  attracts  de- 
posits, and  the  extent  to  which  the  assessments  are  shifted, 
have  a  very  direct  bearing  on  the  question  in  hand. 

But  the  consideration  of  this  proposition  must  be  ex- 
tended to  another  field.  This  question  of  the  justice  of  a 
compulsory  guaranty  assessment  raises  the  whole  question 
of  the  mutual  gains  from  insurance.  Because  of  some  tem- 
porary responsibility  an  individual  may  insure  his  life  for  a 
term  of  years.  If  he  survives  this  period  it  is  far  from  the 
truth  to  say  that  his  insurance  premium  represents  a  dead 
loss  to  him.  He  wanted  temporary  protection  for  some 
object  that  was  dependent  on  him,  and  he  cheerfully  paid 
for  what  he  got.  So  with  a  bank.  An  insured  bank  may 
prove  to  be  solvent  over  a  period  of  years,  but  in  the  mean- 
time the  bank  has  given  to  its  creditors  a  very  real  protec- 
tion from  those  forces  that  might  have  wrecked  it.  But  the 
insured  bank  gains  in  a  yet  wider  sense.  As  Governor 
Cruce  has  well  said,  every  bank  is  vitally  interested  in  the 
stability  of  financial  and  commercial  conditions.  The 
1  For  fuller  discussion  see  pages  73-8*. 


198    THE  GUARANTY  OF  BANK  DEPOSITS 

guaranty  law  in  Oklahoma  is  dissiminating  the  shock  of 
over  fifty  failures  over  a  long  period  of  years.  All  banks  in 
the  state  have  gained  from  the  stabilizing  effects  of  this 
insurance,  and  it  is  quite  certain  that  the  national  banks 
have  reaped  where  they  have  not  sown.  Consequently, 
instead  of  rather  harshly  saying  that  honest  bankers  are 
taxed  to  make  good  the  debts  of  the  dishonest,  the  prob- 
lem should  be  approached  from  the  standpoint  of  the  mu- 
tual gains  from  insurance. 

Finally,  it  must  be  borne  in  mind  that  banking  is  not 
wholly  a  private  business,  for  the  interests  of  the  bank  and 
the  public  are  peculiarly  bound  together.  For  this  reason 
banking  takes  on  a  public  aspect  not  found  in  enterprises 
^  of  a  purely  private  nature.  The  question  of  compulsory 
deposit  insurance  becomes,  therefore,  a  matter  of  public 
policy.  Some  persons  would  preserve  the  extreme  individ- 
ualism of  the  business  and  let  the  resulting  losses  fall  on  the 
public;  others  would  require  the  banks  mutually  to  accept 
the  responsibilities  of  the  public  nature  of  their  business. 
Both  parties  maintain  that  the  position  of  the  other  is 
essentially  unjust.  In  the  heat  of  the  debate  not  enough 
attention  has  been  given  to  the  fact  that  both  parties  have 
much  to  gain  from  deposit  insurance.  It  must  be  evident 
that  the  benefits  of  this  insurance  are  far-reaching  and 
widely  distributed.  Since  both  the  banks  and  the  public 
are  large  beneficiaries,  why  should  not  both  help  to  bear 
the  costs?  It  is  patent,  therefore,  that  the  proposal  to 
create  the  guaranty  fund  in  part  from  a  general  tax  levy 
has  much  to  be  said  in  its  favor.  But  before  these  costs  can 
be  equitably  distributed,  more  attention  must  be  paid  to 
the  three  foregoing  considerations,  namely,  (1)  to  what 
extent  the  banks  profit  from  such  a  law  by  having  their  de- 
posits increased,  (2)  to  what  extent  the  cost  has  already 
been  shifted  on  to  the  public,  and  (3)  the  extent  of  the 
other  mutual  gains  from  this  insurance.  These  are  hard 
questions,  but  they  serve  to  indicate  that  this  whole  matter 


THE  EFFECTS  OF  THE  LAWS  199 

of  the  justice  of  bank  guaranty  is  far  more  subtle  and  com- 
plicated than  has  often  been  supposed. 

7.  The  effect  of  guarardy  laws  on  hoarded  money.  One  of 
the  claims  made  for  a  guaranty  law  was  that  it  would  draw 
into  circulation  the  money  which  was  being  hoarded  and  to 
that  extent  increase  the  banking  power  of  the  country.  It 
was  always  taken  for  granted,  of  course,  that  there  was  a 
great  economic  gain  to  be  derived  from  drawing  money  out 
of  hoarding.  The  controversy  as  to  the  relation  existing 
between  the  amount  of  money  in  circulation  and  prices 
never  occurred  to  the  persons  putting  forward  this  claim. 
To  them  the  statement  that  money  would  be  drawn  into 
circulation  was  in  itself  proof  that  the  consequence  would 
be  an  unalloyed  gain.  The  following  quotation  from  Alex- 
ander H.  Re  veil  shows  the  general  tenor  of  the  assertions 
made  at  that  time: 

It  would  at  once  place  the  immense  amount  of  money  in  hoard- 
ing into  circulation.  How  much  this  is.  lying  in  safety-deposit 
boxes,  under  carpets,  in  mattresses,  etc.,  hidden  away  in  the 
homes  and  elsewhere,  it  is  impossible  to  estimate,  but  the  total, 
it  is  admitted,  would  be  staggering.  This  great  wasted  wealth 
would  be  forced  into  circulation  at  once  by  the  fact  that  banks 
would  become  absolutely  the  safest  place  for  its  preservation.1 

It  is  nearly  impossible  to  exaggerate  the  degree  to  which 
this  argument  for  bank  guaranty  stimulated  the  imagina- 
tion of  many  people.  In  fact,  the  above  quotation  is  rather 
guarded  in  tone  as  compared  with  some  of  the  more  ex- 
travagant statements.  It  was  usually  assumed  that  at 
least  one  billion  dollars  was  hidden  away.  In  one  case  it 
was  estimated  that  the  amount  in  hoarding  was  equal  to 
fourteen  dollars  per  capita.2  When  it  is  recalled  that  the 
total  amount  of  money  in  circulation  for  the  same  year  was 

1  Gorfrnmmt  Insurance  of  Bank  Deposit*,  edited  by  Rollo  L.  Lyman. 
p.  40. 

'  Chicago  Ranker,  July  4,  1908,  p.  31. 


200    THE  GUARANTY  OF  BANK  DEPOSITS 

only  $34.72  per  capita1  the  temerity  of  such  a  guess  is 
evident. 

These  extravagant  claims  show  one  of  the  popular  con- 
fusions as  to  the  nature  of  a  guaranty  law.  Money  drawn 
out  of  hoarding  and  placed  in  banks  would  for  the  most 
part  represent  savings  deposits,  and  primarily  bank  guar- 
anty is  not  intended  to  protect  such  deposits.  In  none  of 
the  states  do  savings  banks  operate  under  the  law.  In 
Texas  even  the  time  certificates  of  deposit  of  the  commer- 
cial banks  are  not  protected.  The  original  Kansas  law  pro- 
tected savings  deposits  in  commercial  banks  only  to  the 
amount  of  one  hundred  dollars  to  any  one  person.  This 
restriction  in  the  Kansas  law  was  later  eliminated,  and 
now  with  the  exception  of  Texas  the  savings  deposits  of 
commercial  banks  are  protected  in  all  the  states. 

It  is  nearly  impossible  to  test  the  result  of  the  laws  at 
this  point.  There  has  been  a  tendency  for  the  deposits  of 
guaranteed  banks  to  increase,  but  there  is  no  way  of  telling 
whence  these  deposits  have  come.  It  is  known  that  they 
have  come  in  part  from  the  national  banks  and  from  all 
indications  this  deflection  goes  a  long  way  in  explaining 
the  gain  made  by  the  state  banks.  Undoubtedly  there 
have  been  eccentric  individuals  who  have  been  induced  to 
place  their  money  in  banks,  but  there  is  no  evidence  that 
the  total  deposits  of  the  state  have  been  greatly  increased 
by  drawing  into  circulation  the  supposedly  large  sums  that 
are  hidden  away.  This  would  seem  to  indicate  that  the 
amount  of  money  in  hoarding  has  been  greatly  exagger- 
ated. 

This  completes  the  review  of  the  more  important  argu- 
ments that  were  used  a  dozen  years  ago  for  and  against  the 
guaranty  principle.  It  is  evident  that  the  claims  on  both 
sides  were  much  exaggerated.  The  principal  cause  of  this 
exaggeration  seems  to  have  been  that  it  was  not  generally 
recognized  that  the  matter  was  one  of  insurance  and  noth- 
1  Report  of  the  Comptroller  of  the  Currency,  1915,  vol.  n,  p.  37. 


THE  EFFECTS  OF  THE  LAWS  201 

ing  else.  The  general  public  was  vaguely  talking  of  the 
"guaranty"  of  bank  deposits;  to  many  there  seemed  to  be 
something  about  it  that  resembled  insurance,  and  in  the 
minds  of  a  few  the  idea  was  lurking  that  it  was  insurance; 
but  for  the  most  part  the  conception  of  the  fundamental 
basis  of  the  proposal  was  at  first  very  indefinite.  It  is  well 
known  that  insurance  exists  primarily  not  to  eliminate  loss, 
but  rather  to  indemnify  and  to  scatter  the  burden  of  the 
loss  after  it  occurs.  If  the  proponents  of  bank  guaranty  had 
understood  more  fully  the  province  of  insurance  in  the  mod- 
ern world  they  probably  would  have  escaped  the  error  of 
thinking  that  bank-deposit  insurance  would  cure  all  the  ills 
of  our  banking  system  as  it  existed  in  1907.  On  the  other 
hand,  the  opponents  of  the  movement  might  have  saved 
themselves  in  the  same  way.  When  modern  governments 
turned  their  attention  to  the  subject  of  social  insurance 
they  had  not  only  few  statistics  as  to  the  risks  involved,  but 
their  control  of  the  risk  was  also  seriously  limited.  Yet 
even  in  the  face  of  these  obstacles  social  insurance  has  at 
least  demonstrated  its  feasibility.  In  marked  contrast  to 
this,  modern  states  have  elaborate  statistics  of  bank  losses 
from  which  to  construct  a  mortality  table,  so  to  speak,  and 
through  their  power  of  bank  supervision  almost  complete 
control  over  the  risk  involved.  The  relative  simplicity  of 
the  insurance  problems  involved  has  made  the  administra- 
tion of  the  laws  much  easier  and  much  less  harmful  than 
many  predicted.  The  whole  movement  reveals  a  striking 
example  of  the  tendency  of  the  American  people  to  over- 
emphasize the  influence  which  legislation  can  have  upon 
economic  conditions. 


CHAPTER  IX 
CONCLUSION 

THIS  essay  opened  with  a  consideration  of  bank  credit  and 
the  r61e  it  plays  in  the  economic  life  of  modern  countries. 
The  attempt  was  made  to  show  that  bank  credit  is  an  ele- 
mental thing  which  manifests  itself  in  two  forms,  namely, 
bank  notes  and  bank  deposits.  In  the  past  note  credit  has 
been  more  widely  employed,  because  it  was  issued  in  a  form 
that  could  be  easily  carried  about  and  used  in  making  pay- 
ments. Because  note  credit  has  been  more  important  his- 
torically, and  because  of  the  form  in  which  it  is  issued  and 
the  nature  of  its  circulation,  the  legislator  has  long  been  im- 
pressed with  the  necessity  of  giving  it  adequate  security. 
But  in  the  last  fifty  years  the  railroad,  the  telegraph,  and 
the  telephone  have  revolutionized  communication  and 
brought  people  closer  together.  This  changed  condition 
powerfully  affected  banking  practices,  for  the  public  gradu- 
ally came  to  find  that  deposit  credit  was  better  adapted  to 
the  new  situation.  This  change  has  been  most  marked  in 
English-speaking  countries,  until  now  in  this  country  the 
magnitude  of  deposit  credit  ranges  all  the  way  from  fifteen 
to  twenty  times  that  of  note  credit,  and  the  deposits  subject 
to  check  transact  about  ninety-two  per  cent  of  the  business 
of  the  country.  By  taking  this  larger  view  of  the  field  of 
barik  credit,  it  is  much  easier  to  see  where  bank-deposit 
insurance  fits  into  a  general  system  of  banking  regulation. 
This  remarkable  change  which  has  occurred  in  the  realm 
of  banking  has  shifted  the  safety  of  the  business  commu- 
nity largely  from  the  shoulders  of  bank  notes  to  those  of  de- 
posits. The  situation  in  this  country  is  peculiar  for  two 
reasons.  In  the  first  place,  with  the  exception  of  England, 
deposit  banking  has  assumed  larger  proportions  in  this 
country  than  in  any  other;  and,  in  the  second  place,  our 


CONCLUSION  203 

adherence  to  the  democratic  principle  of  free  banking  has 
decentralized  banking  responsibility.  When  one  of  the 
isolated  units  of  our  banking  system  fails,  the  public  is 
often  a  heavy  loser.  Under  a  monopolistic,  centralized 
banking  system  the  responsibility  is  concentrated  in  a  few 
hands  and  each  bank,  instead  of  being  an  isolated  unit,  is 
usually  a  branch  of  a  larger  institution.  This  concentra- 
tion of  banking  power  and  banking  responsibility,  coupled 
with  the  relatively  less  use  made  of  deposit  credit,  gives 
the  depositor  a  security  quite  lacking  in  this  country. 
These  peculiarities  of  the  American  banking  situation 
explain  why  state  interference  in  behalf  of  the  depositor 
has  gone  farther  in  this  country  than  in  any  other.  The 
guaranty  laws  are  the  latest  and  most  radical  form  of  this 
state  activity. 

This  essay  has  attempted  to  give  an  account  of  this 
banking  experiment.  Throughout  the  story  there  runs  one 
warning,  beside  which  all  others  sink  into  insignificance. 
Insurance  cannot  be  abused  with  impunity.  Honest  insur- 
ance has  proved  a  great  blessing  to  mankind,  but  it  is  like- 
wise true  that  corrupt  and  dishonest  insurance  may  equally 
exploit  the  public.  There  is  no  magic  about  government 
insurance.  If  the  state  is  to  administer  successfully  a 
bank-deposit  insurance  company  it  must  be  willing  to  pay 
the  same  price  that  is  now  being  paid  by  the  best  private 
insurance  companies.  This  is  the  great  consideration  and 
before  it  all  other  things  must  bow. 

Before  quitting  the  subject  two  other  considerations  de- 
serve attention.  One  of  the  striking  results  of  the  laws  is 
the  deep  root  which  they  have  taken  in  the  public  mind. 
The  underlying  principles  of  the  laws  have  such  a  hold  on 
the  public  that  it  seems  incredible  that  any  of  the  laws 
could  be  uprooted.  A  great  change  has  come  over  the 
bankers  themselves.  The  state  bankers  realize  that  the 
laws  are  with  them  to  stay  and  that  the  best  policy  is  to 
support  them  enthusiastically.  The  national  bankers, 


204    THE  GUARANTY  OP  BANK  DEPOSITS 

realizing  that  the  laws  have  disturbed  their  business  much 
less  than  they  anticipated,  have  lost  much  of  the  bitterness 
that  characterized  their  attitude  years  ago. 

Finally,  it  seems  quite  clear  that  the  movement  as  a 
propaganda  is  dead.  Undoubtedly  from  time  to  time  other 
states  will  adopt  such  laws,  but  the  movement  can  never 
take  the  form  it  did  in  1907  and  1908.  At  that  time  the 
proposal  had  not  been  subjected  to  critical  analysis  with  the 
result  that  too  many  extravagant  claims  were  made  for  it. 
Since  then  the  whole  subject  has  been  enriched  with  a 
wealth  of  experience,  and  the  states  that  enact  such  laws  in 
the  future  will  do  so  with  much  fuller  knowledge  of  what 
may  be  accomplished. 

It  may  confidently  be  expected  that  in  the  years  to  come 
deposit  credit  will  assume  even  a  greater  relative  impor- 
tance in  the  economic  life  of  this  country.  The  growing 
density  of  population  and  the  more  extensive  use  being 
made  of  all  kinds  of  rapid  communication  point  in  this 
direction.  There  is  little  difference  of  opinion  as  to  the  de- 
sirability of  giving  this  credit  security  and  stability;  people 
differ  only  as  to  the  methods  to  be  employed  to  attain  this 
end.  The  problem  is  much  more  difficult  than  that  of  note 
security,  for  deposit  credit  has  been  pyramided  to  such  a 
height  that  the  individual  bank,  working  alone,  cannot 
protect  this  top-heavy  structure  by  the  segregation  of 
special  assets  as  is  usually  done  in  the  case  of  note-credit. 
Consequently,  in  this  age  of  insurance  the  principles  of  in- 
surance have  been  extended  to  this  field  of  human  risk. 
Twelve  years  have  passed  since  the  first  law  was  enacted 
and  in  the  meantime  the  experiment  has  been  transferred 
to  other  states  and  is  now  being  worked  out  under  divers 
conditions.  Since  the  welfare  of  all  is  intimately  con- 
nected with  the  end  in  view,  this  experiment  is  worthy  of 
the  most  dispassionate  observation  and  study. 

THE   END 


BIBLIOGRAPHY 


BIBLIOGRAPHY 

THE  material  for  the  study  of  the  guaranty  of  bank  deposits  may 
for  convenience  be  divided  into  three  general  classes.  In  the  first 
place,  there  is  a  great  mass  of  material  which  the  heated  discus- 
sion in  the  early  stages  of  the  movement  called  forth.  This  ma- 
terial is  in  the  form  of  contributed  articles,  editorials,  and  re- 
ported speeches  of  bankers  and  others  in  which  the  subject  is 
discussed  both  pro  and  con.  This  material  is  of  little  help  in 
studying  the  subsequent  history  of  the  movement,  but  it  is  of 
inestimable  value  in  showing  the  ideas  uppermost  in  the  minds  of 
people  as  they  approached  the  subject  for  the  first  time.  Besides 
the  magazine  articles  listed  below  the  best  sources  of  this  material 
are  in  such  financial  publications  as  the  Chicago  Banker,  the 
Commercial  and  Financial  Chronicle,  the  Bankers'  Magazine, 
Bradstreet's,  etc.  There  is  also  a  great  deal  of  the  same  kind  of 
material  to  be  found  in  the  Proceedings  of  the  American  Bankers' 
Association  and  of  the  State  Bankers'  Associations  in  the  various 
states. 

The  second  source  of  material  is  found  in  such  articles  as  those 
of  Thornton  Cooke,  Z.  C.  Dickinson,  and  V.  E.  Banner.  These 
articles  have  been  written  since  the  laws  became  effective  and 
give  much  valuable  data  regarding  the  different  laws  in  opera- 
tion. Of  these  articles  the  ones  by  Thornton  Cooke  in  the  Quar- 
terly Journal  of  Economics  are  the  most  helpful,  not  only  because 
of  the  study  he  has  given  to  the  laws,  but  also  because  of  his  un- 
biased and  scientific  approach  to  the  subject.  The  articles  by  Z.  C. 
Dickinson  are  confined  to  Nebraska,  and  give  the  best  presen- 
tation of  the  historical  background  of  the  law  in  that  state.  V.  £. 
Danner  has  confined  himself  largely  to  Oklahoma.  He  is  an  ar- 
dent supporter  of  the  guaranty  idea,  and  presents  a  strong  case 
for  that  side  of  the  question. 

Finally,  the  last  general  source  of  information  is  actual  field 
work.  Only  in  this  way  can  indispensable  data  be  secured  and  the 
manifest  temper  of  the  people  be  understood.  This  kind  of  work 
is  especially  important  in  Oklahoma.  When  the  Oklahoma  law 
was  passed  the  state  government  was  not  well  established.  In  the 
meantime  the  state  capital  had  been  removed  from  Guthrie  to 
Oklahoma  City,  and,  pending  the  construction  of  a  capitol  build- 
ing, the  different  state  departments  were  housed  in  various  office 


208  BIBLIOGRAPHY 

buildings  of  the  city.  In  this  confusion  most  of  the  early  records 
of  the  administration  of  the  law  seem  to  have  been  lost.  In  addi- 
tion to  this  the  present  state  banking  department  has  little  sym- 
pathy with  the  early  administration  of  the  law  and  knows  practi- 
cally nothing  of  what  was  then  done.  For  these  reasons  much 
of  the  early  history  of  the  Oklahoma  law  can  be  secured  only 
through  personal  interviews  with  the  men  who  were  in  touch  with 
affairs  at  that  time.  Finally,  the  operation  of  the  Oklahoma  law 
is  inseparably  connected  with  the  remarkable  economic  develop- 
ment of  the  state,  and  some  of  the  aspects  of  this  situation  can  be 
fully  understood  only  after  close  contact  with  the  people  who 
have  lived  through  that  period  of  the  state's  development. 

The  following  list  includes  the  more  important  references  that 
bear  on  the  general  and  special  topics  of  this  essay: 
ANDREW,  A.  P.  "Crux  of  the  Currency  Question,"  Yale  Review, 

New  Series,  1913,  2:595-620. 
ANDREW,  A.  P.    "How  Guaranties  of  Bank  Deposits  Work," 

Literary  Digest,  January  31,  1914. 

AUSTIN,  C.  O.  Circular  Letter  to  State  Banks,  August  31,  1918. 
BEARD,  C.  A.  "The  Constitution  of  Oklahoma,"  Political  Science 

Quarterly,  1909,  24:95-114. 

CHADDOCK,  R.  E.  Safety-Fund  Banking  System  of  New  York. 
CLEWS,  HENRY.  No  Government  Guarantee  of  Bank  Deposits,  and 

no  Ownership  of  Railroads  by  the  Government.   (Pamphlet.) 
COOKE,  T.  "Insurance  of  Bank  Deposits  in  the  West,"  Quarterly 

Journal  of  Economics,  1909,  24:85-108,  327-91. 
COOKE,  T.    "Four  Years  More  of  Deposit  Guaranty,"  Quar- 
terly Journal  of  Economics,  1913,  28:69-114. 
COOKE,  T.  "Deposit  Guaranty  in  Mississippi,"  Quarterly  Journal 

of  Economics,  1915,  29:419-25. 

CRAWFORD,  C.  I.  "Voluntary  Bank-Deposit  Insurance,"  Inde- 
pendent, 1909,  66:570-74. 

DANNER,  V.  E.  "Protecting  the  Bank  Depositor,"  American  Re- 
view of  Reviews,  1914,  49 : 216-20. 

DANNER,  V.  E.  "Is  the  Guaranty  of  Bank  Deposits  Practical 
and  Sound  in  Principle?"  Oklahoma  Journal  of  Education, 
January  8,  1916. 

DEBELL,  E.  J.  "Government  Guaranty  of  Deposits  Idea,"  Har- 
per's Weekly,  1908,52:9. 

DICKINSON,  Z.  C.    "State  Guaranty  of  Bank  Deposits  in  Ne- 
braska," Quarterly  Journal  of  Economics,  1914,  29:187-97. 
DICKINSON,  Z.  C.  Bank-Deposit  Guaranty  in  Nebraska.  (Pam- 
phlet.) 


BIBLIOGRAPHY  209 

FOREMAN,  G.    "Bank-Deposit  Insurance  Law  in  Oklahoma," 

Independent,  1908,  66:1268-71. 

FOROAN,  J.  B.  Guaranty  of  National-Bank  Deposits.  (Pamphlet.) 
HOLDSWORTH,  J.  T.  Money  and  Banking,  pp.  204-08. 
HULL,  W.  H.   Practical  Problems  in  Banking  and  Currency,  pp. 

149-32. 
KINLEY,   DAVID.    "Objections   to   Bank-Deposit    Insurance," 

American  Review  of  Reviews,  1908,  37:845-47. 
KNOX,  J.  J.  History  of  Banking,  Safety-Fund  Banking  System  of 

New  York. 
LANKFORD,  J.  D.  Ten  Years  of  the  Depositors'  Guaranty  System  of 

the  State  of  Oklahoma,  Its  Operation  and  Effect.   (Pamphlet.) 
LAUGHLIN,  J.  L.    "Guaranty  of  Bank    Deposits,"   Scribner's 

Magazine,  1908.  44: 101-09. 
LAUOHLIN,  J.  L.    "Guaranty   of   Bank    Deposits,"    Banking 

Progress,  chap.  v. 
LAUGHLIN,  J.  L.   "Depositor  and  the  Bank,"  Banking  Progress, 

chap.  vi. 

LAUOHLIN,  J.  L.  Guaranty  of  Bank  Deposits.  (Pamphlet.) 
LTMAN,  R.  E.  Government  Insurance  of  Bank  Deposits.  (Edited.) 

Published  by  the  Extension  Division  of  the  University  of 

Wisconsin. 
McCALEB,  W.  F.   "Guaranty  or  Insurance  of  Bank  Deposits," 

Forum,  17:653-61. 
NETTLETON,  A.  B.    "Shall  Bank  Deposits  be  Guaranteed?" 

American  Review  of  Reviews,  1908,  37:340-45. 
PATTERSON,  J.  S.  Six  Years  of  the  Guaranty  Fund.  Senate  Docu- 
ment, no.  478,  64th  Congress,  1st  Session. 
PEARSON,  P.  M.  Bibliography  of  Inter-Collegiate  Debates. 
REVELL,  A.  H.   The  Guaranty  of  Bank  Deposits.   (Pamphlet.) 
SHIBLEY,  G.  H.   History  of  Guaranty  of  Bank  Deposits.   Senate 

Document,  no.  522,  63d  Congress,  2d  Session. 
STEVENSON,  C.  W.    "Objections  to  Guaranteeing  Deposits," 

Bankers'  Magazine  (New  York),  76:163-66. 
TAFT,  W.  H.   Political  Issues,  pp.  146-60. 
TAUSSIG,  F.  W.  Principles  of  Economics,  vol.  I,  pp.  386-90. 
WEBSTER,  W.  C.    "The  Depositors'  Guaranty  of  Oklahoma," 

Journal  of  Political  Economy.  1909,  17:65-81,  466-69. 
WHITE,  HORACE.   Money  and  Banking,  4th  ed..  Appendix  C. 
YOUNG,  A.  M.  "The  Depositors'  Guaranty  Law  of  Oklahoma," 

Journal  of  Political  Economy,  1909,  17:461-«4. 


INDEX 


INDEX 


Abilene  National  Bank,  institutes 
proceedings  to  teat  legality  of 
Kansas  law,  116-17. 

Abilene  State  Bank,  failure  of,  117- 
19 ;  loss  to  guaranty  fund  through, 
119;  183. 

Abilene  Weekly  Reflector,  cited,  118. 

Adams,  H.  < '.,  quoted,  5. 

Adams  and  Sumner,  Labor  Prob- 
lems, quoted,  186. 

Advertising,  permitted  by  Okla- 
homa law,  30-31;  permitted  by 
Kansas  law,  114;  permitted  by 
Texas  law,  150. 

Alamo  State  Bank,  failure  of,  61- 
63:  68. 

Allen,  Governor  Henry  J.,  quoted 
regarding  failure  of  Kansas  State 
Bank,  120-21. 

Allen.  W.  V.,  and  legality  of  Ne- 
braska law,  135. 

Alva  Security  Bank,  failure  of,  59. 

American  Industries,  cited,  77. 

American  National  Bank  of  Bar- 
tlesville.  failure  of,  102. 

Anadarko  State  Bank,  failure  of, 
59. 

Andrew,  A.  Piatt,  quoted  regarding 
passage  of  law  in  Oklahoma,  22; 
208. 

Applebee,  W.  D.,  62. 

Arkansas,  corporation  law  of,  ex- 
tended to  Indian  Territory,  38. 

Assaria  State  Bank,  with  others,  at- 
tack" legality  of  Kansas  law,  117. 

Assessments,  provided  by  Okla- 
homa Inw  and  amendments,  26- 
27;  table  of,  in  Oklahoma,  74; 
liability  of  socoding  Oklahoma 
state  banks  for.  87-88;  under 
Kansas  law,  113;  provided  by 
Nebraska  Inw,  133;  under  Texas 
law.  148-49;  provided  by  South 
Dakota  law,  163;  under  Missis- 
sippi law.  168.  See  Oklahoma, 
Kansas.  Nebraska,  Texas,  South 


Dakota,  and  Mississippi  bank- 
deposit  guaranty  laws. 

Aulne  State  Bank,  failure  of,  121- 
22. 

Ault,  Mattie,  50. 

Austin,  C.  O.,  208. 

Bank  checks,  wherein  they  differ 
from  bank  notes  as  a  medium  of 
exchange,  14 ;  business  transacted 
by  means  of,  16. 

Bank  commissioner,  statement  of, 
regarding  condition  of  Oklahoma 
banks,  40-41. 

Bank  commissioner,  Texas,  report 
of.  cited,  151,  152,  153,  154,  156. 

Bank  credit,  nature  of,  2-4;  limit  to 
manufacture  of,  by  banks,  4; 
danger  to  public  when  abused.  6. 

Bank-deposit  guaranty,  agitation 
for,  in  Nebraska,  20,  132-33; 
in  special  session  of  Kansas  legis- 
lature, 1898.  21;  causes  of  early 
agitation  in  Kansas  for,  21 ;  urged 
before  Oklahoma  Constitutional 
Convention,  21;  defeated  in 
banking  committee,  Oklahoma 
Constitutional  Convention,  21- 
22;  conditions  antecedent  to,  in 
Oklahoma.  20-24;  passage  of 
law  in  Oklahoma,  23;  motive 
prompting  Oklahoma  law,  23— 
24;  effect  of,  on  growth  of  de- 
posits, 46;  agitation  for,  in  Kan- 
sas in  1908,  109-11;  Kansas 
gives  a  fair  t<«t  of,  128;  Toxas 
not  a  fair  test  of,  155;  unsuccess- 
ful agitation  for.  in  other  Mates, 
16O-62;  agitation  for.  in  Colo- 
rado, 160;  agitation  for.  in  Wis- 
consin,  161-62;  in  South  Dakota. 
162-65;  agitation  for,  in  Missis- 
sippi, 165-66;  agitation  for,  in 
Washington,  170;  attitude  of 
bankers  to.  176-77;  necessity  of, 
177-80;  as  a  panic  cure.  180-85; 


214 


INDEX 


as  a  promoter  of  reckless  bank- 
ing, 187-92;  injustice  of,  192-99; 
mutual  gains  from,  197-98;  ef- 
fects of,  on  hoarded  money,  199- 
201;  confusion  regarding  the  na- 
ture of,  200-01 ;  deep  root  taken 
in  public  mind,  203-04;  as  a 
propaganda  probably  dead,  204; 
material  for  study  of,  207-09. 

Bank  Deposit  Guarantee,  Journal, 
cited,  70. 

Bank  deposit  insurance,  com- 
pared with  life,  fire,  and  marine 
as  regards  being  scientific,  31-33; 
assessment,  danger  of,  discussed, 
33;  drawbacks  of,  33-34. 

Bank  deposits,  result  of  granting 
loans,  3;  protection  of,  by  dif- 
ferent banking  systems,  8-11; 
loss  of,  to  depositors  in  national 
banks,  11;  growth  of,  in  New 
York  between  1836  and  1860,  12; 
liability  for,  the  same  as  for  bank 
notes,  13-14;  subject  to  check  in 
United  States,  1918,  15-16;  ratio 
of,  to  bank  notes,  17;  absolute 
protection  possible  only  through 
insurance,  18. 

Bankers'  Deposit  Guaranty  and 
Surety  Company,  organized  to 
insure  Kansas  deposits,  115-16. 

Bankers'  Magazine,  207. 

Bank  failures,  Oklahoma,  42-73; 
International  State  Bank  of 
Coalgate,  42;  Columbia  Bank 
and  Trust  Company,  43-57; 
First  State  Bank  of  Kiefer,  57; 
Bank  of  Ochelata,  58;  Oklahoma 
State  Bank  of  Durant,  58;  Bank 
of  Geary,  58;  Citizens'  Bank  of 
Mountain  Park,  58;  Farmers' 
and  Merchants'  Bank  of  Sapulpa, 
58-59;  Creek  Bank  and  Trust 
Company  of  Sapulpa,  59 ;  Bank  of 
Snyder,  59;  Security  State  Bank 
of  Sulphur,  59;  Alva  Security 
Bank,  59;  Bank  of  Commerce  of 
Alva,  59;  Anadarko  State  Bank, 
59;  Bank  of  Elgin,  59;  Bank  of 
Garvin,  59;  Garfield  Exchange 
Bank,  59-61 ;  Alamo  State  Bank, 
61-63;  Union  State  Bank,  63; 
Night  and  Day  Bank,  64;  First 
State  Bank,  64;  Planters'  and 


Mechanics'  Bank,  64;  Oklahoma 
State  Bank,  64;  First  State  Bank 
of  Capitol  Hill,  64;  causes  of, 
in  Oklahoma,  88-101;  political 
causes  of,  in  Oklahoma,  100-01; 
failure  of  national  banks  in  Okla- 
homa, 102;  in  Kansas,  117-22; 
Abilene  State  Bank,  117-19; 
Kansas  State  Bank,  119-21; 
Aulne  State  Bank,  121-22;  Han- 
over State  Bank,  122;  in  Ne- 
braska, 136-37;  payment  of  de- 
positors of,  in  state  and  national 
banks  in  Nebraska,  137;  in 
Texas,  1887-1909,  146;  in  Texas 
under  guaranty  law,  152-54; 
Hams  County  Bank  and  Trust 
Company,  152;  First  State  Bank 
of  Kopperl,  152;  Paige  State 
Bank,  153;  First  State  Bank  of 
Amarillo,  153;  Farmers'  and 
Merchants'  State  Bank  of  Waco, 
153-54;  Farmers'  and  Merchants' 
State  Bank  of  Teague,  154;  West 
Texas  Bank  and  Trust  Company, 
154;  causes  of,  in  Texas,  154-55; 
in  South  Dakota,  162,  164;  in 
Mississippi  before  guaranty  law, 
165;  in  Mississippi  since  enact- 
ment of  law,  169;  causes  of,  in 
Mississippi,  169-70;  in  Wash- 
ington before  guaranty  law,  170; 
national,  1863-1916,  178;  harm 
done  by,  178. 

Banking,  in  Indian  Territory  prior 
to  statehood,  37-38;  100-01;  in 
Oklahoma  Territory  prior  to 
statehood,  38-40;  100-01. 

Bank  notes,  protection  of,  by  repre- 
sentative banking  systems,  7-8; 
reasons  why  given  better  security 
than  deposits,  11 ;  issued  by  land 
banks  in  Massachusetts  and 
Pennsylvania  before  American 
Revolution,  11-12;  growth  of,  in 
New  York  between  1836  and 
1860,  12;  liability  for,  the  same 
aa  for  deposits,  13-14;  ratio  of, 
to  bank  deposits,  17. 

Bank  of  Commerce  of  Alva,  failure 
of,  59. 

Bank  of  Elgin,  failure  of,  59. 

Bank  of  England,  issue  and  security 
of  notes  by,  7. 


INDEX 


215 


Bank  of  France,  issue  and  security 
of  notes  by,  7. 

Bank  of  Garvin,  failure  of,  59. 

Bank  of  Geary,  failure  of,  68. 

Bank  of  Ochelata,  failure  of,  58. 

Bank  of  Snyder,  failure  of,  59. 

Banks,  commercial,  functions  of,  1 ; 
insure  individual  credit,  4-5; 
effect  of  guaranty  law  on  number 
and  deposits  of  state  and  na- 
tional, in  Oklahoma,  82-88;  or- 
ganization of  new,  in  Oklahoma, 
83-84;  chart  showing  changes 
in  number  of,  in  Oklahoma,  84; 
chart  showing  changes  of  de- 
posits of,  in  Oklahoma,  85;  con- 
version of  state  to  national,  in 
Oklahoma,  86;  size  of,  in  Okla- 
homa, 87;  liability  of,  that  na- 
tionalized, for  guaranty  assess- 
ments, 87-88;  speculative  and 
wild-cat,  in  Oklahoma,  103;  na- 
ture of,  in  Kansas  in  early  times, 
107;  admitted  to  guaranty  by 
Kansas  law,  112-13;  liquidation 
of,  failed,  in  Kansas,  113;  insuring 
deposits  of,  in  private  company 
in  Kansas,  115-16;  deposits  of 
guaranteed  and  unguaranteed,  in 
Kansas,  123-28;  chart  showing 
changes  in  number  of,  in  Kansas, 
126;  table  showing  number  and 
deposits  of,  in  Kansas,  125;  chart 
showing  changes  in  deposits  of, 
in  Kansas,  127;  assessments  of 
new,  in  Nebraska,  133;  national 
become  state,  in  Nebraska,  137; 
growth  of  national  and  state, 
in  Nebraska,  1904-1907.  137-38; 
state,  nationalize  in  Nebraska, 
139;  growth  of  state  and  na- 
tional, in  Nebraska,  1909-1919, 
139-43;  chart  showing  changes 
in  number  of,  in  Nebraska,  141; 
chart  showing  changes  in  de- 
posits of,  in  Nebraska,  142;  fail- 
ure of.  in  Texas.  1887-1909,  146; 
attitude  of  national,  in  Texas,  to 
guaranty  law,  147;  number  of,  in 
Texas,  156;  chart  showing  changes 
in  number  of,  in  Texas,  157;  chart 
showing  changes  in  deposits  of,  in 
Texas,  158;  failure  of,  in  Missis- 
sippi before  guaranty  law,  165; 


number  operating  under  Wash- 
ington law,  172;  supervision  of, 
the  greatest  safeguard  to  the 
public,  180. 

Barker,  D.  A.,  quoted,  9  n.. 

Bartlesville,  light  and  water  bonds 
of,  delivered  to  Co  be  and  Mc- 
Kinnon,  55;  bonds  of,  delivered 
by  Norton  to  banking  board,  56  n.. 

Becker,  C.  L.,  quoted  as  to  influ- 
ence of  the  frontier,  25. 

Belgium,  security  of  bank  notes 
and  deposits  in,  9  n.. 

Bonaparte,  Attorney-General,  de- 
nies power  of  national  banks  to 
operate  under  Oklahoma  law, 
35;  115. 

Boom,  in  Kansas,  91-92;  in  Kansas 
City,  92-93;  in  Omaha,  92;  in 
Fort  Worth,  92;  in  Minneapolis, 
92;  in  Wichita.  93-94;  in  Okla- 
homa, 91,  94-97;  break  of,  in 
Oklahoma,  97-99;  how  the  banks 
became  involved  in,  in  Okla- 
homa, 100;  in  Kansas,  107;  in  Ne- 
braska, 131. 

Bradley,  J.  H.,  62. 

Bradstreet's,  62;  207. 

Bradway,  C.  M.,  62. 

Breidenthal,  John  W.,  urges  guar- 
anty law  in  Kansas,  20;  quoted 
in  favor  of  guaranty  law  in  Kan- 
sas, 108;  guaranty  bill  drafted  by, 
109. 

Bristow,  J.  R.,  favors  bank  guar- 
anty in  Kansas,  111. 

Broeker,  Felix,  and  others  wreck 
Kansas  State  Bank,  119-20. 

Brown,  C.  H.,  62. 

Brown,  Elmer  E.,  quoted  regarding 
boom  in  Kansas  City.  92-93. 

Bryan,  W.  J.,  introduces  guaranty 
bill  in  Congress,  131-32;  aids 
bank  guaranty  in  Nebraska,  133; 
addresses  Texas  legislature  re- 
garding bank  guaranty,  147. 

Bryce,  James,  quoted  regarding 
experimental  legislation  in  Okla- 
homa, 24 ;  quoted  as  to  nature  of 
American  people,  25-26;  quoted 
aa  to  confidence  of  Westerners, 
91. 

3urden  of  guaranty  assessments, 
in  Oklahoma,  73-76;  in  Okla- 


216 


INDEX 


homa,  as  a  per  cent  of  capital 
stock,  75;  in  Oklahoma,  on  in- 
dividual banks,  75;  in  Texas,  155. 

Campbell,  Governor  of  Texas, 
urges  guaranty  legislation,  147; 
calls  two  special  sessions  of  legis- 
lature to  consider  guaranty  legis- 
lation, 147-48;  quoted,  148. 

Canada,  issue  of  notes  by  banks 
of,  7. 

Capital  National  Bank,  failure  of, 
131. 

Certificates  of  indebtedness,  Okla- 
homa law  regarding,  27,  28;  is- 
sued in  Oklahoma,  73;  Kansas 
law  regarding,  113;  no  provision 
for,  in  Nebraska,  134-35;  ad- 
vantages of  using,  134-35;  no 
provision  for,  in  Texas,  159; 
under  South  Dakota  law,  163-64; 
under  Mississippi  law,  168. 

Chaddock,  R.  E.,  208. 

Characteristics  of  Oklahoma  law, 
31. 

Checking  system,  as  a  means  of 
extending  the  field  of  bank  credit, 
3;  panics  mitigated  by  bank 
guaranty  making  more  stable, 
184-85. 

Chicago  Banker,  cited,  124,  199; 
207. 

Citizens'  Bank  of  Mountain  Park, 
failure  of,  58. 

Citizens'  National  Bank  of  Broken 
Arrow  r>.  State,  cited,  88. 

City  Auditor,  Oklahoma  City,  An- 
nual Report,  1916,  cited,  96. 

Clews,  Henry,  208. 

Cobe  and  McKinnon,  purchase  as- 
sets of  Columbia  Bank  and  Trust 
Company,  49;  54;  55. 

College  Park  Development  Com- 
pany, 66. 

College  Park  Land  Company,  66. 

Colorado,  deposit  guaranty  in, 
160-61. 

Columbia  Bank  and  Trust  Com- 
pany, failure  of,  43-57;  growth 
of  deposits  of,  43-44;  methods 
employed  by,  to  get  deposits,  44 ; 
deposits  of  country  banks  with, 
45;  46;  causes  of  failure  of,  47; 
50;  payment  of  depositors  of, 


50-55;  funds  with  which  to  pay 
depositors  of,  52;  effect  of  fail- 
ure of,  on  other  Oklahoma  City 
banks,  53 ;  incompetence  in  liqui- 
dation of,  54;  aational  bankers 
and  the  closing  of,  55;  61;  62; 
63;  64;  69;  cost  of  liquidation  of, 
73n.;74;  185. 

Commercial  and  Financial  Chron- 
icle, cited,  54,  75;  207. 

Commissioner  of  school  land  de- 
partment, deposit  with  Columbia 
Bank  and  Trust  Company,  45. 

Competition  of  state  and  national 
banks  in  Oklahoma,  effect  of,  on 
shifting  burden  of  guaranty  as- 
sessments, 79. 

Comptroller  of  the  Currency,  Report 
of,  cited,  11,  16,  80,  87,  107,  125, 
137,  138,  139,  140,  141,  143,  146, 
178,  200. 

Conant,  Charles  A.,  quoted  as  to 
supervision  of  foreign  banks  of 
issue,  8  n. ;  quoted  as  to  American 
system  of  bank  examination, 
10  n.. 

Congressional  Record,  cited,  132. 

Conner,  Dr.  L.  A.,  quoted  as  to 
why  International  State  Bank  of 
Coalgate  was  closed,  42. 

Conner  Oil  Company,  49. 

Conservative  bankers  watching 
reckless,  185-87;  breakdown  of 
the  theory,  185;  why  theory 
broke  down,  186;  how  conserva- 
tive bankers  in  Oklahoma  have 
reduced  reckless  banking,  186-87. 

Constitutionality  of  bank-guaranty 
laws,  in  Oklahoma,  34-37;  in 
Kansas,  116-17;  in  Nebraska, 
135-36;  in  Texas,  151. 

Cooke,  Thornton,  quoted  as  to  re- 
sponsibility of  guaranty  law  for 
failure  of  Columbia  Bank  and 
Trust  Company,  47;  quoted  as 
to  burden  of  assessments  on 
banks,  75;  quoted  on  Mississippi 
law,  165-66;  207;  208. 

Cotteral,  Judge  John  H.,  grants 
Abner  Davis  new  trial,  70. 

Cotton,  production  of,  in  Okla- 
homa, 89. 

Crawford,  C.  I.,  208. 

Credit,  bank,  nature  of,  1-7;  guar- 


INDEX 


£17 


anty  of,  7-20;  when  healthy,  182; 
relative  importance  of  note  and 
deposit,  202;  dangers  of,  in  this 
country,  203. 

Creek  Bank  and  Truat  Company, 
failure  of,  59. 

Cruce,  Governor,  quoted  as  to  tax 
levy  to  liquidate  indebtedness  of 
guaranty  fund,  104;  quoted  as  to 
mutual  gains  from  bank  guar- 
anty, 197. 

Daily  Oklahoman,  cited,  23;  quoted, 
93-94. 

Dallas  Newt,  cited,  147,  148. 

Danner,  V.  E.,  quoted,  42;  207; 
208. 

Davis,  Abner,  purchases  Night  and 
Day  Bank,  67-69;  in  the  courts, 
70-71;72;  185. 

DC  Bell.  E.  J.,  208. 

Democratic  Party,  favors  bank 
guaranty  in  Nebraska,  132;  in 
Texas  favors  bank  guaranty, 
147;  favors  bank  guaranty  in 
South  Dakota,  162. 

Department  of  the  Interior,  38. 

Depositors'  Bond  Security  System, 
provisions  of,  149-50;  number  of 
banks  operating  under.  151. 

Depositors'  Guaranty  Fund  Com- 
mission, in  South  Dakota,  163. 

Depositors'  Guaranty  Fund  Sys- 
tem, provisions  of,  148-49;  num- 
ber of  banks  operating  under, 
151. 

Deposits,  of  state  and  national 
banks  in  Oklahoma  as  affected 
by  guaranty  law,  82-88;  of  state 
and  national  banks  in  Kansas  as 
affected  by  guaranty  law,  122- 
28;  Ggures  on,  by  Bank  Commis- 
sioner Dollcy,  124;  table  giving 
figures  for,  of  state  and  national 
banks  in  Kansas,  125;  charts 
showing  changes  of.  in  Kansas, 
127;  of  state  and  national  banks 
in  Nebraska,  139-43;  of  state 
and  national  banks  in  Texas, 
156;  chart  showing,  of  banks  in 
Texas,  158. 

Dickens,  Charles,  quoted,  91. 

Dickeraon,  J.  T.,  urges  bank  guar- 
anty before  banking  commit- 


tee of  Oklahoma  Constitutional 
Convention,  21. 

Dickinson,  Z.  C.,  quoted  as  to  con- 
ditions leading  to  bank  guaranty 
in  Nebraska,  131-32;  131  n.;  207; 
208. 

Difficulty  of  convicting  bank 
wreckers,  72;  in  Kansas,  121. 

District  Court  of  Garfield  County, 
orders  sale  of  bank  assets,  61. 

Dividends  paid  by  Oklahoma  state 
banks,  81. 

Dolley,  Bank  Commissioner,  gives 
figures  as  to  deposits  of  Kansas 
guaranteed  and  unguaranteed 
banks,  124. 

Dunbar,  C.  F.,  quoted  as  to  simi- 
larity of  liability  for  bank  notes 
and  deposits,  13-14;  quoted  as  to 
relative  growth  of  notes  and  de- 
posits of  banks  in  this  country, 
15;  quoted  as  to  need  for  pro- 
tecting deposit  currency,  16. 

Eleventh  Biennial  Report  of  the  Kan- 
tas  Bank  Commissioner,  cited, 
119. 

Examination  of  banks  before  Okla- 
homa law  put  into  operation,  40- 
41. 

Examiner,  state  bank,  of  Washing- 
ton, quoted  as  to  operation  of 
law.  172. 

Exchange  Drilling  Company,  49. 

Exchange  Investment  Company, 
61-62. 

Exchange  Oil  Company,  61-62. 

Farmers'  and  Merchants'  Bank  of 
Sapulpa,  failure  of,  58-59. 

Farmers'  and  Merchants'  State 
Bank  of  Teague,  failure  of,  154. 

Farmers'  and  Merchants'  State 
Bank  of  Waco,  failure  of,  153- 
54. 

Farmers'  National  Bank  of  Tulaa, 
failure  of,  102. 

Farmers'  State  Bank,  failure  of, 
137. 

Farm  products,  value  of,  in  Okla- 
homa. 89-90. 

Federal  Reserve  Act,  cited,  8. 

Federal  Reserve  notes,  issue  and 
security  of,  8. 


218 


INDEX 


Ferguson;  President,  Garfield  Ex- 
change Bank,  60. 

Fifth  Biennial  Report  of  the  Okla- 
homa Bank  Commissioner,  cited, 
87;  quoted  on  wild-cat  banking 
in  Oklahoma,  105. 

First  Annual  Report  of  State  Bank- 
ing Board,  cited,  74  n.. 

First  Annual  Report  of  the  Oklahoma 
Bank  Commissioner,  cited,  34, 42 ; 
quoted,  43. 

First  National  Bank  of  Superior, 
failure  of,  137. 

First  National  Bank  of  Sutton, 
failure  of,  137. 

First  State  Bank,  loss  from  failure 
of,  64;  68;  71. 

First  State  Bank  of  Amarillo,  fail- 
ure of,  153. 

First  State  Bank  of  Capitol  Hill, 
loss  from  failure  of,  64;  71. 

First  State  Bank  of  Kopperl,  fail- 
ure of ,  152-53;  185. 

First  State  Savings  Bank,  failure 
of,  137. 

Fisher,  Irving,  quoted  as  to  func- 
tions of  banks,  4—5;  quoted  as 
to  similarity  of  liability  for  bank 
notes  and  deposits,  13;  cited, 
16. 

Five  Civilized  Tribes,  control  of, 
37-38. 

Flack,  John  A.,  wrecks  Abilene 
State  Bank,  118;  185-86. 

Foreman,  G.,  209. 

Forgan,  James  B.,  quoted  as  to 
earnings  of  deposits,  76;  quoted 
as  to  causes  of  bank  failures, 
99-100;  quoted  as  to  justice  of 
bank  guaranty,  191 ;  209. 

Fort  Worth,  boom  of,  92. 

Foster,  Frank,  62. 

Fourth  Biennial  Report  of  the  Kan- 
sas State  Bank  Commissioner, 
cited,  107. 

Fourth  Biennial  Report  of  the  Okla- 
homa Bank  Commissioner,  cited, 
73. 

Freund,  Ernest,  quoted  as  to  col- 
lective responsibility  in  reducing 
certain  risks,  196. 

Garfield  Exchange  Bank,  failure  of, 
69-61. 


Garnett,  M.  R.,  testimony  of,  at 
Davis  trial,  69. 

Genesee  Chemical  Company,  62. 

German  Imperial  Bank,  issue  and 
security  of  notes  of,  7. 

Gillispie,  F.  P.,  introduces  first 
bank-guaranty  bill  in  Kansas, 
108. 

Guaranty  fund,  in  Oklahoma  by 
law  of  1907,  26;  in  Oklahoma  by 
laws  of  1909  and  1913,  26-27; 
custody  of,  in  Oklahoma,  28;  in- 
debtedness of,  in  Oklahoma  in 
1914,  104;  out  of  debt  in  Okla- 
homa, 105-06;  present  condition 
of,  in  Oklahoma,  105-06;  in 
Kansas,  113;  loss  to,  in  Kansas, 
123;  size  of,  in  Kansas  at  present, 
129;  size  of,  in  Kansas  unimpor- 
tant, 129-30;  provided  for,  by 
Nebraska  law,  133;  custody  of, 
in  Nebraska,  133;  loss  to,  in  Ne- 
braska, 136-37;  present  size  of, 
in  Nebraska,  144;  provided  by 
Texas  law,  148-49;  present  size 
of,  in  Texas,  151-52,  158;  loss  to, 
in  Texas,  152;  under  South  Da- 
kota law,  163;  rewards  paid 
from,  in  South  Dakota,  164; 
size  of,  at  present  in  South  Da- 
kota, 164;  loss  to,  in  South 
Dakota,  164;  size  of ,  under  Mis- 
sissippi law,  168;  present  size  of, 
in  Mississippi,  169;  loss  to,  in 
Mississippi,  169;  size  of,  in 
Washington,  171,  172.  See  Okla- 
homa, Kansas,  Nebraska,  Texas, 
South  Dakota,  Mississippi,  and 
Washington  bank-deposit  guar- 
anty laws. 
Guilbert,  E.  J.,  indebtedness  of,  to 

Kansas  State  Bank,  120. 
Guthrie   Daily   Leader,    cited,    23; 
quoted,  25  n.. 

Hadley,  President  A.  T.,  quoted  as 

to    banks    insuring    credit,    5; 

quoted,  26. 
Hallam,  I.  S.,  and  failure  of  Abilene 

State  Bank,  118. 
Hanover   State   Bank,    failure   of, 

122. 
Barlow's   Weekly,   quoted,   95-96; 

cited,  96.  , 


INDEX 


219 


Harris  County  Bank  and  Trust 
Company,  failure  of,  152. 

Harrison,  F.  A.,  132  n.. 

Haakell,  Governor  Charles  N., 
urges  bank  guaranty  before 
banking  committee,  Oklahoma 
Constitutional  Convention,  21; 
urged  guaranty  law  in  first  mes- 
sage, 23;  25  n.;  42;  before  Wis- 
consin committee,  47;  closes 
Columbia  Bank  and  Trust  Com- 
pany, 51;  and  national  bankers, 
65;  reasons  of,  for  shielding  Nor- 
ton and  others,  56;  effect  of 
shielding  Norton  on  other  bank- 
ers. 67;  65;  67;  69;  185. 

Hendrey  v.  United  States,  quoted, 
70-71. 

Henson  Oil  Company,  stock  of,  de- 
livered by  Norton  to  banking 
board,  57  n.. 

Hoarding  of  money,  effect  of  bank 
guaranty  on,  199-201 ;  actual  ef- 
fect of  bank  guaranty  on,  200. 

Hobart,  First  National  Bank  of, 
failure  of,  102. 

Hoch,  Governor  of  Kansas,  calls 
special  session  of  legislature  to 
enact  guaranty  law,  110;  vetoes 
Waggener  bill,  111. 

Holdsworth,  J.  T.,  209. 

Holmes,  Justice,  quoted  regarding 
constitutionality  of  Oklahoma 
law,  36-37;  136;  quoted  regard- 
ing protection  of  deposit  cur- 
rency, 179. 

Hook.  Judge  W.  C.,  reverses  deci- 
sion which  held  Kansas  law  un- 
constitutional, 117. 

Hull,  W.  H.,  209. 

Ilsley,  James  K.,  quoted  as  to 
growth  of  Columbia  Bank  and 
Trust  Company,  44. 

Incidence  of  guaranty  assessments 
in  Oklahoma,  76-H2;  insured 
pays  for  insurance,  76;  increase 
of  deposits  as  a  compensation, 
78;  long-run  conditions  absent, 
78;  effect  of  law  governing  in- 
terest paid  for  deposits.  79;  ef- 
fect of  competition  of  national 
banks,  79;  interest  rates  in  Okla- 
homa and  neighboring  states, 


80;  causes  of  high  rates,  80-81; 
dividends  paid  by  state  banks 
in  Oklahoma  and  neighboring 
states,  81;  probable  effect  of 
assessments  in  Oklahoma,  82; 
197. 

Indian  Territory,  banking  in,  be- 
fore statehood,  37-38. 

Individualism  in  banking,  193,  195, 
196; 198. 

Ingalls,  John  James,  quoted  re- 
garding boom  in  Kansas,  91-92. 

Injustice  of  bank  guaranty,  192- 
99;  attitude  of  bankers  to,  192- 
93;  social  point  of  view,  193-94; 
bankers  placed  on  same  level, 
194-95;  banking  affected  with  a 
public  interest,  195;  justice  of 
collective  responsibility  for  risks 
of  banking  business,  196;  in- 
crease of  deposits  as  a  compensa- 
tion for,  196-97 ;  burden  may  be 
shifted  on  to  public,  197;  mutual 
gains  from  deposit  insurance, 
197-98. 

Insurance,  phases  of,  in  guaranty 
laws,  31-34;  relaxes  vigilance  of 
party  insured,  189;  control  of 
moral  hazard  in,  188;  mutual 
gains  from  deposit,  197-98;  de- 
posit, a  matter  of  public  policy, 
198;  not  at  first  realized  that 
bank  guaranty  a  matter  of,  201 ; 
abuse  of.  203. 

Interest  rates  charged  in  Oklahoma, 
80. 

International  State  Bank  of  Coal- 
gate,  failure  of,  42. 

Interviews  on  the  Banking  Si/stemt 
of  Europe,  National  Monetary 
Commission,  cited,  7. 

Jackson,  General  Andrew,  146. 

Jacksonian  Democracy,  and  dis- 
trust of  banking  in  Texas,  145-46. 

Jaedicke,  August,  wrecks  Hanover 
State  Bank,  122. 

Johnson,  J.  F.,  quoted,  4. 

Johnson,  V.  C).,  wrecks  Aulne  State 
Bank,  121-22;  methods  used  to 
wreck  bank,  121-22. 

Kansas  bank-deposit  guaranty 
law,  nature  of,  111-17;  volun- 


220 


INDEX 


tary,  112;  no  attempt  to  pay  de- 
positors at  once,  112;  banks  that 
may  operate  under,  112-13;  as- 
sessments under,  113;  size  of 
guaranty  fund  under,  113;  clos- 
ing failed  banks  under,  113;  with- 
drawal of  banks  from,  114;  in- 
terest rate  paid  on  guaranteed 
deposits  under,  114;  advertising 
of  guaranteed  banks  under,  114; 
penalty  for  violation  of,  114; 
penalty  on  reckless  banking 
under,  114;  banks  must  be  one 
year  old  to  operate  under,  115; 
surplus  of  banks  operating  under, 
115;  amendments  to,  115;  rate  of 
interest  banks  may  pay  under, 
1 15 ;  national  banks  may  operate 
under,  115;  number  of  banks  op- 
erating under,  123;  failure  of 
banks  under,  117-23. 

Kansas  City,  boom  of,  92-93. 

Kansas  City  Star,  quoted,  119; 
cited,  120;  quoted,  120. 

Kansas,  conditions  antecedent  to 
guaranty  law  in,  107;  agitation 
for  guaranty  law  in,  20-21; 
causes  of  agitation  for  guaranty 
law  in,  107;  bank  failures  in, 
from  1892  to  1900,  107;  boom 
in,  107;  crop  failures  in,  107; 
early  banking  in,  107;  agitation 
for  guaranty  law  in  1908  in, 
109-10;  banking  laws  of,  made 
more  stringent,  114;  develop- 
ment of  country  banks  in,  128. 

Kansas  department  of  banking, 
charged  with  negligence  and  in- 
efficiency, 122. 

Kansas  Reduction  Company,  61. 

Kansas  State  Bank,  failure  of, 
119-21;  methods  of,  to  get  de- 
posits, 120;  payment  of  deposi- 
tors of,  121;  prosecution  of  offi- 
cers of,  121. 

Kentucky  and  Ohio  Oil  and  Re- 
fining Company,  61. 

Kinley,  David,  cited,  16;  209. 

Knox,  J.  J.,  cited,  12;  209. 

Landon  Investment  Company,  61- 

62. 
Lankford,  J.  D.,  Oklahoma  bank 

commissioner  from  1911  to  1919, 


105;  quoted  on  wild-cat  banking 
in  Oklahoma,  105;  209. 

Laughlin,  J.  Laurence,  quoted  re- 
garding risks  of  free  banking,  9; 
cited,  10;  quoted  as  to  why  note 
issues  were  early  regulated,  12  n. ; 
quoted  as  to  causes  of  financial 
crises,  181-82;  209. 

Leader  Oil  and  Gas  Company,  49. 

Leedy,  Governor  of  Kansas,  calls 
special  session  of  legislature  to 
consider  guaranty  legislation, 
20-21;  108. 

Lee  Oil  Company,  49. 

Lefferdirik,  H.  J.,  wrecks  Kansas 
State  Bank,  119-20. 

Legislation,  experimental,  and  the 
frontier,  24-26. 

Liquidation  of  insolvent  banks, 
under  Oklahoma  law,  29-30; 
improved  methods  of,  72-73; 
under  Kansas  law,  113;  under 
Nebraska  law,  134;  under  Texas 
law,  149-50;  under  South  Da- 
kota law,  163;  under  Mississippi 
law,  168-69;  under  Washington 
law,  171-72.  See  Oklahoma, 
Kansas,  Nebraska,  Texas,  South 
Dakota,  Mississippi,  and  Wash- 
ington bank-deposit  guaranty 
laws. 

Locke,  W.  L.,  132  n.. 

Longcape,  M.  E.,  urges  bank  guar- 
anty in  Texas,  147. 

Lyman,  R.  E.,  209. 

McCaleb,  W.  F.,  209. 

McClelland,  J.  C.,  quoted  as  to 
condition  of  banks  that  came 
under  Oklahoma  law,  41. 

McFadden,  V.,  49;  50;  62. 

McKinley,  Margaret,  49;  and  Okla- 
homa City  real-estate  boom,  69. 

McLean,  R.  S.,  67. 

Macleod,  H.  D.,  quoted  as  to  na- 
ture of  bank  deposits,  2;  quoted 
as  to  similarity  of  bank  notes 
and  deposits,  13. 

Madison  Oil  Company,  62. 

Menefee,  James  A.,  44;  45;  49;  62. 

Military  Park  Company,  bonds 
and  notes  of,  delivered  by  Nor- 
ton to  banking  board,  57  n.;  66. 

Minneapolis,  boom  of,  92. 


INDEX 


221 


Mississippi  bank-deposit  guaranty 
law,  board  of  bank  examiners 
under,  165-67;  qualifying  exam- 
ination for  examiners,  166-67; 
compulsory,  167;  assessments 
under,  168;  guaranty  fund  pro- 
vided by,  168;  custody  of  guar- 
anty fund  under,  168;  liquida- 
tion of  banks  under,  168-69; 
interest-bearing  certificates  is- 
sued under,  168. 

Mississippi,  conditions  antecedent 
to  guaranty  law  in,  166-66. 

Moral  hazard,  in  insurance,  188;  in 
deposit  insurance,  187-88;  con- 
trol of,  188-89;  control  of,  in  de- 
posit insurance,  192. 

Moran.  L.  A.,  62. 

Mosher,  C.  W.,  advocated  bank 
guaranty,  131. 

Munger,  Judge  Thomas  C.,  and 
Judge  Willis  Van  Devanter  de- 
clare Nebraska  law  unconstitu- 
tional, 135-36;  decision  of,  over- 
ruled by  U.S.  Supreme  Court, 
136. 

Munn  r.  Illinois,  quoted,  195-96. 

Murdoch,  Marshall,  quoted,  93-94. 

Mutual  Depositors'  Guaranty 
Fund  of  Georgia  and  Florida,  20. 

Mutual  Investment  Company,  62. 

National  banking  system,  issue 
and  security  of  notes  of  banks 
of,  7-8. 

Nature  of  banks  insured  in  Okla- 
homa. 37-42. 

Nebraska  bank-deposit  guaranty 
law.  133-36;  resembles  Okla- 
homa law,  133;  compulsory,  133; 
guaranty  fund  provided  by,  133; 
assessments  under,  133;  custody 
of  guaranty  fund,  133;  assess- 
ments of  new  banks,  133;  pay- 
ment-of  depositors  under,  134; 
amendments  to,  134;  makes  no 
provision  for  interest-bearing 
certificatea,  134;  special  features 
of.  134-25:  in  the  courts,  135-36; 
bank  failures  under,  136-37; 
growth  of  state  banks  under, 
140-43;  not  tested  yet,  143. 

Nebraska,  conditions  antecedent  to 
guaranty  law  in,  131-33;  bank 


failures  in,  from  1891  to  1896, 
131. 

Necessity  of  bank  guaranty,  177- 
80;  guaranty  of  deposits  created 
by  loans,  177-79. 

Needles,  Homer,  50. 

Nettleton,  A.  B.,  209. 

New  banks  organized,  assessments 
of,  in  Oklahoma,  30;  assessments 
of,  in  Nebraska,  133-34;  assess- 
ments of,  in  Texas,  149. 

New  Mexico  ranch,  purchased  by 
Broeker  and  Lefferdink,  119. 

Night  and  Day  Bank,  61;  64;  67; 
purchase  of  by  Putnam  and 
Davis,  67-69;  70;  185. 

Noble  State  Bank,  begins  court 
action  to  test  legality  of  guaranty 
law,  35 ;  36. 

Noble  State  Bank  r.  Haskell,  cited, 
35. 

North  Dakota  guaranty  law,  172-75. 

Norton.  W.  L.,'44;  45;  46;  48;  49; 
60;  securities  of,  turned  over  to 
banking  board  during  liquida- 
tion of  Columbia  Bank  and 
Trust  Company,  56  n.-57  n. :  61- 
63;  68;  and  the  failure  of  the 
Farmers'  National  Bank  of 
Tulsa,  102 ;  sentenced  to  the  peni- 
tentiary, 102;  185. 

Oil,  production  of,  in  Oklahoma,  90. 

Oklahoma,  wealth  of,  89;  value 
of  farm  products  of,  89-90;  oil 
production  of,  90;  boom  in,  91; 
development  of  boom  in,  94-96; 
statistics  of  crops  of,  1906-1912, 
97;  significance  of  crop  failures 
in,  98;  shrinkage  in  values  in, 
98-99;  opportunities  for  the  de- 
velopment of,  99. 

Oklahoma  and  Indian  Territory 
Bankers'  Association  favor  bank 
guaranty,  22-23. 

Oklahoma  bank-guaranty  law,  na- 
ture of,  26-31 ;  assessments  under 
original  law,  26;  guaranty  fund 
as  provided  by  amendment  of 
1909.  26-27;  guaranty  fund  as 
provided  by  amendment  of  1913, 
27;  limit  upon  extra  aimonsments 
in  1909,  27;  assessments  pro- 
vided by  present  law,  27;  ccrli- 


222 


INDEX 


ficates  of  indebtedness  provided 
by  law  of  1909,  27;  custody  of 
guaranty  fund,  28;  composition 
of  state  banking  board,  28-29; 
liquidation  of  insolvent  banks 
under,  29-30;  deposits  protected 
by,  30;  assessments  of  new  banks 
organized  under,  30;  bank  fail- 
ures under,  42-73. 

Oklahoma  City,  founding  and  early 
history  of,  95»  growth  in  popula- 
tion, 95;  boom  of,  95-96;  build- 
ing permits  in,  1907-1915,  96; 
bank  clearings  of,  1908-1915,  96; 
overbuilt,  95-97. 

Oklahoma  City  Times,  quoted,  66, 
67;  cited,  69. 

Oklahoma  State  Bank,  liquidates 
Bank  of  Ochelata,  58. 

Oklahoma  State  Bank  of  Durant, 
failure  of,  58. 

Oklahoma  State  Bank  of  Muskogee, 
assessments  of,  75. 

Oklahoma  State  Bank  of  Okla- 
homa City,  loss  from  failure  of, 
64;  71. 

Oklahoma  State  Capital,  quoted, 
23  n.. 

Oklahoma  Territory,  banking  in, 
before  statehood,  38-40. 

Oklahoma  Trust  Company,  61 ;  68. 

Omaha,  boom  of,  92. 

Owen,  Senator  Robert  L.,  urged 
bank  guaranty  in  1907,  23. 

Paige  State  Bank,  failure  of,  153. 

Panics,  bank  guaranty  as  a  cure  for, 
180-85;  how  prevented,  180-81; 
bank-guaranty  panic  philosophy, 
181;  effect  of  bank  guaranty  on 
bank  "runs,"  181-82;  nature  of, 
181-82;  conditions  resulting  in, 
181-82;  how  bank  guaranty 
might  prevent,  183;  prevention 
of,  by  accumulation  of  large 
guaranty  fund,  183-84;  preven- 
tion of,  by  making  checks  cir- 
culate longer,  184-85. 

Patterson,  J.  S.,  209. 

Pearson,  P.  M.,  209. 

Planters'    and    Mechanics'    Bank, 

.  loss  from  failure  of ,  64 ;  67 ;  71 ;  se- 
curities deposited  with,  by  bank- 
ing board,  102. 


Plehn,  C.  C.,  quoted  regarding 
shifting  of  tax  on  mortgages,  77. 

Politics,  motive  for  enactment  of 
Oklahoma  law  not,  23;  and  the 
early  enforcement  of  the  law, 
40-41;  and  the  closing  of  Inter- 
national State  Bank,  42-43;  and 
the  Columbia  Bank  and  Trust 
Company,  55;  and  the  enforce- 
ment of  the  law,  103;  banking 
board  divorced  from,  105;  and 
bank  guaranty  in  Texas,  147. 

Pollock,  Judge  J.  C.,  declares  Kan- 
sas law  unconstitutional,  117. 

Populist  movement,  and  bank 
guaranty,  20-21;  108;  wreck  of, 
in  Kansas,  109;  and  bank  guar- 
anty in  Nebraska,  131. 

Public  Examiner  of  South  Dakota, 
Report  of,  cited,  164. 

Putnam,  I.  M.,  50;  62;  and  Putnam 
City,  64-69;  purchase  of  Night 
and  Day  Bank,  67;  70;  71. 

Putnam  City,  real-estate  boom, 
65-67;  185. 

Putnam  City  Company,  66. 

Putnam  Company,  66. 

Quarterly  Journal  of  Economics, 
cited,  20,  35,  54,  75,  84,  103,  116, 
123,  134,  137,  143;  207. 

Raymond,  W.  C.,  49;  62. 

Reckless  banking,  effect  of  bank 
guaranty  on,  187-92;  theory 
upon  which  claim  based,  187; 
and  the  moral  hazard  in  deposit 
insurance,  188-89;  in  Oklahoma, 
190;  in  Kansas,  188;  in  Nebraska, 
190;  in  South  Dakota,  190-91; 
causes  of,  in  Oklahoma,  191;  in 
Texas,  191;  effect  of  deposit  in- 
surance on,  192. 

Reichsbank,  The,  National  Mone- 
tary Commission,  cited,  7. 

Renfrew  Oil  and  Gas  Company, 
stock  of,  delivered  by  Norton  to 
banking  board,  56  n. ;  62. 

Report  on  the  Oklahoma  State  Guar- 
anty Fund,  Arthur  Young  and 
Company,  cited,  49,  50,  56-57, 
61,  73. 

Republican  Party,  attitude  of,  to 
guaranty  legislation  in  Kansas 


INDEX 


and  South  Dakota,  24,  111;  atti- 
tude of,  to  bank  guaranty  in 
Nebraska,  132-33;  favors  bank 
guaranty  in  South  Dakota,  162. 

Reserves,  required  under  National 
Banking  Law,  10;  under  Federal 
Reserve  Act,  10. 

Revell,  Alexander  H.,  quoted  re- 
garding effect  of  bank  guaranty 
on  hoarded  money,  199;  209. 

Renew  of  Renews,  The,  cited,  20. 

Roberts  Oil  Company,  49. 

Robinson,  W.  J..  49. 

Rowland,  L.  A.,  62;  63. 

Rubinow,  I.  M.,  quoted  as  to  con- 
trol of  moral  hazard  in  insurance, 
188-89. 

Rush,  President  of  Texas  Consti- 
tutional Convention,  1845, 
quoted  as  to  danger  of  banks, 
145-46. 

Safety-Fund  Banking  System,  Na- 
tional Monetary  Commission, 
cited,  12. 

Safety-Fund  Banking  System  of 
New  York,  a  special  fund  to 
guarantee  all  debts  of  banks,  12; 
breakdown  of,  12;  amendment 
of,  13;  as  a  forerunner  of  bank 
guaranty  in  Oklahoma,  20. 

Second  Biennial  Report  of  the  Kan- 
sas State  Bank  Commissioner, 
cited.  107. 

Second  Biennial  Report  of  Oklahoma 
Bank  Commissioner,  cited,  54,  57, 
83. 

Secretary  of  Slate  Banking  Board, 
Nebraska,  Report  of,  cited,  138, 
139,  140.  143,  144. 

Security  State  Bank  of  Sulphur, 
failure  of.  59. 

Seligman.  E.  R.  A.,  quoted  as  to 
relative  security  of  bank  notes 
and  deposits,  16-17. 

Sessions,  Charles,  quoted,  108,  109. 

Shallenberger,  Governor  of  Ne- 
braska, attitude  of,  to  bank 
guaranty,  132. 

Shiblcy,  G.  H..  209. 

Shifting  of  the  guaranty  assess- 
ments in  Oklahoma,  76-82;  in- 
crease of  deposit*  as  a  compensa- 
tion for,  78;  long-run  conditions 


absent,  78;  effect  of  law  govern- 
ing interest  paid  for  deposits,  79; 
effect  of  competition  of  national 
banks,  79 ;  interest  rates  in  Okla- 
homa and  neighboring  states, 
80;  cause  of  high  rates,  80-81; 
dividends  paid  by  state  banks 
in  Oklahoma  and  neighboring 
states,  81 ;  probable  effect  of  as- 
sessments in  Oklahoma,  82. 

Smock,  Bank  Commissioner,  42; 
44;  46. 

South  Dakota  bank-guaranty  law, 
law  of  1909,  162;  law  of  1915, 
163-64;  depositors'  guaranty- 
fund  commission,  163;  compul- 
sory, 163;  assessments  under, 
163;  guaranty  fund  under,-163; 
no  provision  for  extra  assess- 
ments, 163;  interest-bearing  cer- 
tificates under,  163-64;  bank 
failures  under,  164. 

Southwest  Mortgage  Company,  49; 
62;  63. 

Special  assessments,  Oklahoma  law 
and  amendments  regarding,  26- 
27. 

Special  Committee  on  Banking,  Re- 
port of,  Wisconsin  Legislature, 
quoted,  regarding  W.  L.  Norton, 
45;  quoted  as  to  responsibility  of 
guaranty  law  for  growth  of  Co- 
lumbia Bank  and  Trust  Com- 
pany, 46-47;  quoted  as  to  effect 
of  guaranty  law  on  bank  runs,  53 ; 
quoted  as  to  possibilities  of  de- 
velopment of  Oklahoma,  99. 

Spotta,  8.  J.,  152;  185. 

Stanley,  Governor  of  Kansas,  rec- 
ommendation regarding  guar- 
anty law,  109. 

State  Banking  Board,  in  Oklahoma 
under  law  of  1907.  28;  changes 
made  in  composition  of,  in  Okla- 
homa, 28-29;  duties  of,  in  Okla- 
homa, 29;  early  policy  of,  in 
Oklahoma  of  giving  aid  to  failing 
banks.  102-03. 

Stair  Examiner  and  Inspector,  Re- 
port of,  cited,  45,  56. 

State  r.  Farmers'  National  Bank 
of  Cushing,  cited,  88. 

Statistical  Ahitract  of  United  States. 
1915.  cited,  90. 


224 


INDEX 


Stevenson,  C.  W.,r209. 

Stock  pavilion,  at  Enid,  financing 
of,  60. 

Stubbs,  W.  R.,  favors  bank  guar- 
anty in  Kansas,  111. 

Sturm's  Oklahoma  Magazine,  cited, 
48;  quoted  regarding  growth  of 
deposits  in  Oklahoma  City,  53. 

Taft,  W.  H.,  209. 

Tanner,  John  E.,  62. 

Taussig,  F.  W.,  quoted  regarding 
development  of  deposit  banking, 
17. 

Territorial  Bank  Commissioner, 
Oklahoma,  quoted  as  to  early 
banking  in  Oklahoma,  39-40. 

Texas  bank-deposit  guaranty  law, 
148-52;  a  dual  system  created, 
148;  compulsory,  148;  assess- 
ments under,  148;  guaranty 
fund  provided  by,  148-49 ;  emer- 
gency assessments  under,  149; 
custody  of  guaranty  fund  under, 
149;  interest-bearing  certificates 
not  issued  under,  149;  assess- 
ments of  new  banks  under,  149; 
Depositors'  Bond  Security  Sys- 
tem, 149-50;  payment  of  deposi- 
tors under,  149;  liquidation  of 
banks  under  bond  security  sys- 
tem, 150;  relation  of  deposits  to 
capital  under,  151;  bank  failures 
under,  152-55;  burden  of,  to 
banks,  155. 

Texas,  conditions  antecedent  to 
guaranty  law  in,  145-48;  pro- 
hibits banking  institutions,  145- 
46;  state  banks  permitted  in 
1904  in,  146;  bank  failures  in, 
1887-1909,  146;  struggle  for 
guaranty  law  in,  147-48;  banking 
laws  of,  made  more  stringent, 
150—51 ;  causes  of  bank  failures  in, 
154—55;  conditions  in,  not  favor- 
able for  test  of  guaranty  law,  155; 
outlook  for  guaranty  law  in,  158- 
59. 

Third  Biennial  Report  of  the  Kansas 
State  Bank  Commissioner,  cited, 
107. 

Third  Biennial  Report  of  Oklahoma 
State  Bank  Commissioner,  cited, 
85,  86. 


Third  Biennial  Report  of  the  Terri- 
torial Bank  Commissioner,  Okla- 
homa, cited,  39. 

Topeka  Daily  Capital,  cited,  21, 108, 
109. 

Turtle  Oil  Company,  49. 

Twelfth  Biennial  Report  of  the  Kan- 
sas State  Bank  Commissioner, 
cited,  119,  125. 

Twenty-Five  Oil  Company,  49; 
50;  stock  of,  delivered  by  Norton 
to  banking  board,  57  n.. 

Union  State  Bank,  failure  of,  63. 
United     States    Supreme    Court, 
Oklahoma  law  before,  36. 

Van  Devanter,  Judge  Willis,  and 
Judge  Thomas  C.  Munger  de- 
clare Nebraska  law  unconstitu- 
tional, 135-36;  decision  of,  over- 
ruled by  U.S.  Supreme  Court, 
136. 

Vaughan,  Frank  W.,  152. 

Veasey,  James  A.,  62. 

Waggener,  B.  P.,  kills  guaranty 
bill  in  Kansas,  110;  introduces 
bill  to  insure  deposits  in  a  private 
insurance  company,  110-11. 

Waite,  Chief  Justice,  quoted  re- 
garding property  clothed  with  a 
public  interest,  195-96. 

Walter,  G.  W.,  49;  50. 

Washington  bank-deposit  guar- 
anty law,  170-72;  voluntary, 
170;  composition  of  guaranty- 
fund  board,  170-71;  guaranty 
fund  provided  by,  171;  liquida- 
tion of  banks  under,  171-72; 
number  of  banks  operating 
under,  172. 

Washington,  conditions  in,  leading 
to  law,  170. 

Webster,  John  L.,  and  legality  of 
Nebraska  law,  135. 

Webster,  W.  C.,  209. 

Weekly  Kansas  City  Star,  cited,  121 ; 
quoted,  121-22. 

Wellsville  Oil  Company,  62. 

West,  Attorney -General,  begins 
grand-jury  investigation  of  fail- 
ure of  Columbia  Bank  and  Trust 
Company,  56. 


INDEX 


225 


West  Texas  Bank  and  Trust  Com- 
pany, failure  of,  154. 

Whedon,  C.  O.,  132. 

White,  Horace,  quoted,  5;  cited,  7; 
209. 

Wichita,  boom  of,  92-94. 

Wickeraham,  Attorney -General, 
rules  regarding  power  of  national 
banks  to  operate  under  Kansas 
law,  115;  on  power  of  national 
banks  to  insure  deposits  in 
private  companies,  116. 

Wildman,  M.  8.,  cited,  25. 

Williams,  Chief  Justice  R.  L., 
renders  decision  regarding  legal- 
ity of  Oklahoma  law,  35. 

Wisconsin    Committee,    Report    of, 


quoted  regarding  W.  L.  Norton, 
45;  quoted  as  to  responsibility 
of  guaranty  law  for  growth  of 
Columbia  Bank  and  Trust  Com- 
pany, 46-47;  quoted  as  to  effect 
of  guaranty  law  on  bank  runs, 
53;  quoted  as  to  possibilities  of 
development  of  Oklahoma,  99. 
Wisconsin,  deposit  guaranty  in, 
161-62. 

Year  Book  of  the  Department  ofAgri* 
culture,  1914,  cited,  89,  90,  97. 

Young,  A.  M.,  209. 

Young,  Arthur,  and  Company,  re- 
port of,  on  state  guaranty  fund, 
cited,  49,  50,  56-57,  61,  73. 


CAMBRIDGE  .  MASSACHUSETTS 
U   .   S    .   A 


DATE  DUE 


CAVLORO 


un     iRRARY  FACILITY 


A  A      000059597 


3  121000751  7319 


